Nichole,
I just finished the same exact job as you, same S600 (as original in 2000) and YES, the rear heat exchanger inlet and outlet fittings are just that little bit smaller in diameter. And I have the same 5/8 inch heater hoses from the engine to the water heater (I replaced all my hosing about 4 years ago) and they fit tight to every fitting on the boat but the Water Heater!
The first thing I noticed was the ease at which the hoses slid over the fittings and flopped around. To easy in fact!
I'm assuming your boat is in the water because you said you have a leak at both fittings, so you've tested it. Mine isn't in yet.
Your teflon tape idea is what I did to make a more snug fit. But what I did was I used was a tape called "Blue Monster PTFE Teflon Tape". It's thicker and rubbery to the feel, designed for a wider gap thread.
I wrapped the fitting(s) from the inside edge of the tank, to the edge of the Bell End. It's about 2 inches long on each. I wrapped enough to make the entire fitting a little less in diameter than the Bell. The hoses slid on rather tight and I used 2 clamps on each.
There's just about enough room for two, but they fit.
I can't tell you if they will drip or not when hot antifreeze starts flowing through, but in a couple of week will be the real test.
But I think you are right in using teflon tape to take up the difference, but not the "white" tape. The Blue Tape ( more costly if I remember right, $4.00 vs 0.99) but matches rubber hose to rubber and should be a leak proof fit.
Why they made the fittings smaller in diameter I'll never know. But my guess is $$$. And it may even be the hose manufacturer decreasing ID size for the same reason.
Good luck with the final step. I know it's a lot of work and time removing the seat top and sliding it out of the way in that area. But I'm 99.99% sure this fix will take care of the drips.
Lets us know.