Hey it's a boat... labor of love... you've done a bunch to this boat... you'll have a sweet ride when it's done.. timing stinks... but I would drain the transmission to avoid mess - change the damper plate trans filter as long as you have it apart.
also if you're taking that all out - maybe changing the rear main seal may be a good idea not sure of the steps but as long as everything this is of? what do the experts say.
I bet PO never maintained starter and may have not engaged and started chewing up flywheel..
...A bad day water skiing still beats a good day at work...1995 Pro Star 205....