When you removed the lower unit, did you disturb the shift rod at all? The shifting problem sounds like you changed the height of the shift rod, which alters shifting. This is a very precise measurement and must be exact for the LU to shift properly.
Is your testing on a set of muffs or with the LU submerged in a tank? If submerged, the water needs to be about 2"-3" above the anti ventilation plate for the impeller to properly draw water. If there is still no water from the telltale then it's possible you didn't get the water tube properly aligned with the pump.
I'd suggest you pull the LU, double check your shift rod height, check your water pump ensuring you got the rubber grommet in the water tube connection, and make sure your water tube is properly inserted.
KJ