I had one and it was a great running motor. Congrats on saving it! I never had mine apart in the same way you did, though. Having a look at a parts diagram:http://www.chriscraftoutboards.com/chal ... ssion.html
It looks like the water tube is retained from above and slides into the lower housing without a grommet, much like old K-model Mercurys did. In the case of Mercury, the tube would often get stuck in the lower housing, sometimes requiring you to cut it off, to remove the lower unit.
My question is this: When you took off the lower housing, was the water tube retained in the lower housing or up somewhere under the power head? If your tube stayed in the lower housing, I am guessing that's not right; and thus your problem might be getting the tube back in to the upper gland, in a way that was not intended. Let us know if that's the case?