Exhaust should exit all the way out at the back of the tractor.
Governor operation is CRITICAL!!!!!! to the longevity of the tractor. The way the trans input shaft is designed, unless you have the bearing plate on the end where the driveshaft slips on, over-rev the engine once, and you are done. It will snap that shaft like a toothpick, and they are NLA..... (I should know, I got the last one, for just that reason.....)
That is in REALLY nice shape for it's age. Where did you get the starter from??? I was thinking about just rebuilding one of mine..... the solenoid doesn't like to stay engaged.