I just rebuilt the impeller on my outboard. This is on the water hose, 900 rpm idleing. I'm concerned because I can see water coming out of the hole where the shift rod runs down into the lower unit. Not sure if its always done this, but there is no water in the lower unit oil.

2. showing where its leaking from (arrow is the "leaking" water)

I think I would be more concerned about that much water coming out of the relief ports. Looks to me like you either don't have T'stats in it or they are bad. That water there is probably just coming out of one of the many bleed holes, however, that sure looks like a lot of water coming the reliefs when most of it should be coming out through the prop, if the T'stat are good.

Don't try to adjust the idle, just incase you had the notion, it's going to be high on the hose because there is no backpressure that's there when the boat is sitting in the water. Same with the carbs idle, can't make any adjustments on the hose.

It took about 5 minutes of idleing for them to get to be that level.  It idles around 600 in water, I set it on the lake just high enough that it wouldnt stall. I ordered some more thermostats, just as the spring ritual - I try to change them out when I do my impeller. But I waited on mine until i replaced my friends (same motor) to determine if it was within my reach.

Will that much water coming out of the ports potentially hurt the motor as long as I allow it to warm up? When I remove the cover after just running it, I can touch the cylinder heads, and its probably the same temp as a hot shower, so I figured around 130 - 140 degrees.

Not going to really hurt anything in the near future, just makes the motor run way too cold and lets it carbon up badley.  This is what causes the damage.  THe carbon flakes off the pistons and being as hard as it is, lodges in the sides of them and wears the crap out of the cylinder walls and it also lets the rings gum up so you start getting more and more blow by. THis all boils down to a motor that should run a couple thousand hours being ready for a rebuild in less than 1000.

Alright, I ordered the thermostats yesterday, they should be in a few days. Just wanted to make sure it wont hurt anything going fishing tomorrow.  I decarb twice a year, add seafoam to each tank, and run xd-50 oil through it, and as far as I can tell (shining a light into the spark plug holes) there isnt a bit of carbon in there. This motor only has 227 hours on it (dad bought it new when he graduated high school), so I want it to last another few years until I upgrade boats.