The bypass passageway routes part of the coolant flow from the area of the thermostat back to the water pump inlet. It keeps the coolant from forming stagnant spots that would result in steam pockets if it was not in motion. On some engines like the heavy-duty 261's and 292's the bypass passageway is much larger to flow more coolant when the thermostat is closed. Drilling the thermostat valve is not a factory-reccomended procedure but it seems to work to avoid an air pocket forming near the thermostat.
Jerry

"It is better to be silent and be thought a fool than to speak and eliminate all doubt!" - Abraham Lincoln
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