Now the weird thing is while it's running if I unplug the whole knock module everything runs perfect. Oddly there's a constant 7.5 volts on the purple white wire still which I thought only got voltage from the knock module. This is making me think the icm is bad and injecting voltage onto this lead screwing everything up. The purple white wire is not frayed or shorting to anything.
On the 5.7l engine the purple/white wire is connected into both the Ignition control module and the knock module along with the purple "power" wire coming from the ignition key is also connected into both modules so only unplugging one harness (knock) could be the reason you still seen 7.5 volts.
Since it seems to work with the knock module disconnected, that may still indicate a bad knock module. Plus since you tried your ICM on another boat, that seems to indicate the ICM is okay..... Does your friends boat have a knock module he'd let you try?
If not, If you shop it right online, you can find lower costs on either GM or Mercruiser knock modules or you may even be able to match one up from an auto parts store for less money using a GM truck part form the 90's. Here's some examples with prices from high to low,
http://www.ebay.com/sch/sis.html?_nkw=Mercruiser+Knock+Module+806611T
Get the numbers off of the knock sensor on your engine and input them into both EBay and online for possible other lower costs just so you can rule out the knock module.
We/you really didn't clear up the miss matched serial number info mentioned in post #2 so not to sure of the history of the engine and swapped out components..Was it a complete running engine you installed? If so do you know if it was a bravo or Alpha stern drive that was attached to it originally?
If the sticker on the ignition control module is still legible, it should have the wording Bravo or Alpha on it.
But before suspecting the modules, I would also be suspecting a possible bad module wire harness plug connector for things like a wire backing out of the connectors or corrosion buildup between wire pin connectors allowing wires to contact each other. So be sure to thoroughly/internally inspect the module plug connectors.
While this guy in the following link doesn't have a knock module for his 5.0L Alpha carbureted engine due to the 5.0L Alpha drives don't come with a knock system...Only 5.0's with bravos do, he seemed to sort of have similar enough issues as you seem to be having and it turned out he said he found a bad fuse....So you may want to thoroughly inspect all your fuses too. Also it wouldn't be a bad idea to trying jumping the engine cannon plug connector like seen in the video linked below to see if the engine will run better too.
http://www.justanswer.com/boat/70012-thunderbolt-timing-advance-problem-i-98-mercruiser.html
https://www.youtube.com/watch?v=NUoXFIo2Ab8