My turn ot chime in.
First good for you deciding to restore the boat. It looks to be in good shape cosmetic wise so it'll be a beauty when the rot is fixed.
As far as the Merc goes (I'm another inline 6 junkie..help!)
The "flush" port is just that, When you look at the bottom piece of the watermump housing that fits into the lower unit, the passage way that you thread into channels water up the water tube to the block and dos bypass the impellor. The intent is to be able ot flush the motor without running it to clear the block and exhaust water jacket of corrosiv esalt water or flush silt out. You may get a minimum of water pushing back to the impellor outlet but you are lucky mnot to have damaged the impellor. If you want to run the motor get muffs.
Jim, Bobs nose cone bypass hoses thread into NEW holes that are added intersecting into the water intake passage. The existing multi hole intake is blocked off during the process of installing the new nose piece.
The 25 :1 ratio would not hurt anything but you will smoke more and have faster carbon build-up.
Hesitation can come from many things. The easiest cure is to richen the idle mixture screws a tad. There are no accelerator pumps on these carbs like you see on a car so the idle circuit has to dump fuel at sudden throttle opening to cover the bogging of this temporary leanout. The next thing is that I doubt the points have been touched, this is the last year of the two coil/two point set distributor. The point sets may be worn and out of adjustment. This is a little more complicated. The lower portion of the distributor splits in half to facilitate the adjustment but it is fairly involved and not the post to delve into the proceedure. I do see you have blue ignition wires which are non-original so someone has been doing some tuneup work. The ignition wires generally never go bad so it is cuious this was done. Maybe they did some points work too, that's either good or scary depending on their working knowlege of these two point set ignitions.
I agree, burn the manuals you have and get the MERC manual for 65 and later. It is worth the cost... period.
There is no high speed testing that can be done on the stand with muffs. There is no load on the motor and other than idle the fuel loads are totally different so you cannot adjust for your hesitation this way. Your motor is timed by measuring piston position BTDC rather than a timing light. That's just the way Merc did these dual point systems, there is no timing light marker.
To store the motor I would run it at idle on muffs, and then spray fogging oil in the three carbs, un plug the fuel connector and let it run out of gas while you continue ot spray fogging oil.
This will coat internals adn eliminate fuel from gumming up over time. What little is left in the system will evaporate. Check the gear oil, should not be creamy color (mocha) and no plain water.
Your motor is such a clean original it is my humble opinion that you should leave the cosmetics alone, anyone can repaint but only clean well cared for motors have the original paint so keep it if you can. These are old and the patina from age is OK if it's decent.
There are several things you can do the the motor while waiting for the boat to be done. All will require some disassembly to get at the parts for replacement. These motors are pretty bullet proof if you keep the impellor good and mix your fuel. I think the 90 cu in motors (like your 1000) is one of the best inline 6 motors Merc made. The basic mechanics are probably fine on your motor, it is seals and the distributor that should be refurbished. Once it's back on th eboat I'd run some decarbonizer through it to keep the rings healthy. Judjing by the condition of the inner wire harness you have a GEM on your hands.
As far as trim goes, the clamp bracket, two cylinder in place of the shock systems, became available in 67 and will go on earlier motors, Merc made them to retrofit and they sold a kit to do so, the very early FGS 6's needed an upgraded clamp bracket but I think yours is fine, there are missing holes on the earlier brackets which are not easily added in the right place. The parts from a donor motor will swap right over. You will need to REMOVE your reverse tilt lock mechanism on your motor to do this. On a boat like yours expect minimal performance increase, I'd only do it if you are constantly avoiding shallows due to not having a handy tilt up. Spend your money wisely reliability should trump performance if you are on a budget, otherwise go for it!
These are fascinating motors for sure and pretty straight forward but, it is the sublties that seperate a great running one from a not so good one. If you have good mechanical aptitude you have plugged into the right place for knowlege. Expect to have to buy a few Merc specialty tools as well as parts.
Good luck,
Randy