I didn't take any pictures, but today I took it all apart and cleaned it up to to get a better look for wear. The teeth on the gears are in good shape and do indeed look like they are brand new. The portion, on both reverse and forward gears, that makes contact with the clutch dog had some rub marks though I wouldn't consider it excessive at all. The clutch dog is worn somewhat where it makes contact with the gears more then I would like, but it still appears that it should lock in. After reassembling it all, I made the adjustment that Pappy mentioned and could definitely tell a difference when it bottomed out. Just turning it by hand the clutch dog locked in well. At this point I am hoping for the best and will be able to give it a test run next week to see if it's working ok.
On a side note, I recently checked into replacement front and reverse gears and dog clutch and I was truly astounded at the prices. For just 3 parts, no labor just the parts....around $800! Dear god, for that price I could buy a lot newer motor without any big issues. As many old Mercs, Mariners, Johnsons and Evinrudes as are still on the water you would think the prices would be somewhat more reasonable.
Chris