85hp Johnson shifting problem

I have a 1977 Johnson Javelin 85hp and am having problems getting it into gear. I just bought the boat and changed the water pump on it last weekend (did not mess with the shift rod). Took it out and had to adjust the cable on the motor a little to get it into foward. After that, it ran fine for the day. Took it out this morning and could not get it into foward again. Messed with it for a while then decided to take it to the house.

After all day tinkering with it, I have come up with the following...
I disconnected the shift cable from the motor, manually put the motor in neutral and then adjusted the cable to a slip fit. Moved the motor to foward and the cable is close to a slip fit, but in reverse, the cable has to be adjusted quite a bit.

This is where its gets discouraging... I have noticed that sometimes while running the shift lever through to adjust the cable, the shift lever in the control will actually jump a tooth. This will happen when I go to foward and then to full throttle then back to neutral. What I have figured out is that something in the lower unit is binding not allowing the gears to mesh and is putting tension on the cable causing it to jump a tooth. If I turn the prop a little, the motor will fall into gear as its suppose to.

I tried turning the shift rod out 1 turn and also in 1 turn and no change. Actually when I turned it out, I was running out of adjustment on my cable so I put it back to the way it was originally (2 turns out from bottoming).

Anyone have any ideas or suggestion on what to do? BTW the model motor is 85ETLR77S.