Thanks Fleetwin,
Ill go through your response in order.

Yes the gearcase is really rough. I am going to replace it once I know the rest of the motor is sound. I also want to make it a short shaft anyway.

I still have the gearcase off so I will inspect those passages again, but as far as I can tell the waste oil coating the inside pretty much prevented any corrosion there despite how ugly the outside is.
After acquiring the motor 30 something years ago, it was a mostly freshwater motor with a seasonal trip to the ocean lasting 4-7 days. It did not live in salt. Electrolysis is more likely. I do know that the wiring on the boat was really rough and usually had issues (now its just gone, problem solved).
The impeller housing has minor pitting but not in locations that could let air in and not enough to leak ALL of the water by the lobes. If I just had low flow I would consider looking for a new housing.
The vent hole is clear, I noticed it when I replaced the impeller. It had been plugged with gunk previously but I replaced the impeller before trying to start the motor the first time. I checked the hole again when I sealed the water pump and it was still clear.
Wouldnt the thermostat housing need to be downstream of the cylinder jacket so that the thermostat was seeing engine temp instead of lake temp?
when I was doing my choke supply test I reinstalled the thermostat and cover to make sure there would be positive pressure in the water jacket.
The mouse damage is ugly but superficial. The metal corrosion is just the surface and will clean up fine. Just a lot of missing paint. I will worry about aesthetics when/if the function is good. They mostly wrecked hoses and wires.
There was no indication of a mouse nest in the exhaust cavity but there were some droppings down inside the lowest area that has to drain out the weep hole. I flushed it all out when I cleaned out the weep hole.
When I was pushing water backwards through the system, I expected the water pressure to force the little check valve shut and more or less stop flow. Chalk this up to me lack of understanding of the water path inside these motors.
I agree, a known good gearcase and impeller would be a great test. I am watching the various local adds and will snag a parts motor or gearcase if I see it. As noted, if the problem is more serious and related to the motor itself I dont want buy a gearcase for an anchor.
I like your leakdown test suggestion. I was letting the sealant cure so the gearcase is still on my bench. Do you think I can do the same test with the housing and impeller installed? I can fill through the outlet and return grommets.

Thanks Frank, I understand the harsh life of salt. Do you feel the same way for the freshwater use with a seasonal 1 week in the salt? I cant speak to its life before my father bought it but after that it was only those short trips once a summer most years.

The inner exhaust plate is the thinner SS type. Can these still erode and get pin holes? I would take the outer cover off to check it but I am fairly sure I will break several of the screws so have been hesitant to try it.

I had held off on pulling the head because it has good compression and I did not want to damage the head gasket. If an assessment of the condition of the metal at the liner and aluminum juncture is needed, I will take it off. This should also get me a better idea of the condition inside the water jacket.

Does my fairly good, matched compression readings of 120PSI give you any pause? should I hold off pulling the head?

This may turn into an educational experience in learning the water path in these motors even if it cant be saved. At this point I’m both frustrated and curious and want to know what’s going on even if it cant be fixed.

I pulled the head. It looks really good in there. Some light scoring of the cylinders but with 120 on both im not worried about it.
Pictures attached.