should have kept the gills with lungs

Eh, Rex Reason's character does make a small comment later on about how the gills may still be able to grow back, but Jeff Morrow's character dismisses him flat-out. Then again, by this point it's also established that Morrow's character has a few lights out in the ol'marquee, so to speak.

I always thought it'd be kind of a neat idea for another sequel to reveal the Gill-Man not only still alive, but having gone through yet another state of biological mutation, adapting to both land AND sea - have his gills shut off and 'switch over' to his lungs while on land, but then when he gets back to the water, the gills 'switch on' and open up again. Of course, the technology to realize something like that on screen wouldn't have existed even back in the late '50s.