Well it is official, I pulled the lower unit and removed the water pump assembly and the shaft spins freely when the gear case is in gear.
Looks like a special tool may be needed to proceed further (has off ->). Anyone have a x-long drive shaft (measures 28 3/16" tip to housing. Also, it appears that the little bolt on top of the shaft must have been sheared off (stuck up there still?). Any help and advise is appreciated.