Bill, after reading about your success, I was determined to get the water jacket cover off before needing to pull the powerhead. I managed to get two of the bottom bolts out without breaking those off. The third bottom bolt wasn't so fortunate. In all, eight out of twelve will need to be drilled and tapped. Didn't think I was ever going to get that water jacket cover off. I heated those broken bolt studs a lot and resorted to some gentle prying. (I was very gentle with it. Didn't want any part of that cover breaking off on me.) Finally, I broke out the Dremmel tool and put the small diameter engraving bit on it. I used that to clean the area around the holes and broken studs. I'd swear those bolts were installed using loctite. It wasn't until I used that Dremmel tool to clean out a sufficient quantity of Loctite around the broken bolts that the cover actually began to come off. I got the cover off, and lo and behold, there wasn't any inner water jacket cover. It was like what you described with yours. The cylinders look "bell" shaped with the water jacket area around the cylinders. There are two holes on the port side going into the exhaust area, and it appears that there are two holes, one top and one bottom, one the front port side of the engine next to the cylinder walls. Couldn't see those all that well as it was beginning to get dark out here. I'll compare what I have to the what you have as soon as I see the pics of yours.
I'll get started on the drilling/tapping, today. The lifting eye/gaskets/pump kit are also supposed to arrive, today. I'll definitely need to pull that powerhead to remove that bottom cowl so I can drill/tap those bottom bolts. There is no way on mine to get a drill or a tap in there for those.
I was kind of half-way hoping that there would be an inner jacket to remove so I could get a really good look at the inside of those cylinders. However, after thinking about it, I'm glad there isn't one to remove. It would have been an even more pain to deal with. I'm going to buy one of those small work lights, the ones that are one a flexible tube of sorts with the light on the end. I'll stick that inside the spark plug holes and shine it up against the walls to see what it looks like in there.
I'll probably use grade A Loctite on mine, as well. That's the red stuff. I've used that before on 3/4" studs, and I struggled to break those loose and unscrew when the time came. No wonder those 1/4-20's just snapped off so easy. I personally think Mercury didn't intend for those bolts to ever be removed. I suppose since the design called for small bolts around sufficient heat and vibration, they didn't want to take any chances.
With respect to your impeller being put in with the vanes backwards: I'd fix that before running it. From what I understand, that's some pretty tough material, and once it forms, it might break once formed into shape with the vanes moving in the wrong direction. Just my opinion. I don't have any experience with those, so I couldn't say yay or nay for sure. Hope you find the answer to that question. Edited: I saw the thread you started about the impeller and the response you got. I was surprised that the impeller should be able to "fix" itself provided it hasn't sat there for years. Oh well, I haven't actually laid eyes or touched an impeller, yet, so I guess those are pretty flexible. Live and learn.