Houston, we have a problem!
I had a hunch that the drive baffle had a crack in it, because water was coming into the engine compartment. So yesterday I pulled the stern drive off, and yep. That bearing is trashed. Call into a repair place and got a quote to fix it (already have the replacement bearing) and the labor was more than the specialty tools needed to teardown and install new bearings and new baffles.
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Have kilt, will travel...