There are 3 of them in your drive. There is one for the exhaust, the U-Joint, and shift cable. you need to repair it before next season. These keep water out from where it shouldn't be... you run the risk having your boat sink if you use it the way it is, especially if your u-joint bellows is the torn one.
Bellows replacement is not really a DIY job, although it is possible - several special tools are required (see
www.sterndrives.com/mercruiserhelp.html). A marina can to the job for $500-$600.