Want to isolate the issue(s), and with that in mind would disconnect the remote cables at the engine. If the engine is frozen (pistons stuck), there will be little or no movement of the flywheel if you try to move it by hand. It's a solid metal to metal feel, unlike the compression resistance Bonz describes. That is similar to what you would feel if the issue is with the lower unit (e.g., old motor with the gears rusted up, binding the driveshaft). Sounds like these issues are unlikely.
With the engine off, you normally have to rock a flywheel a little or turn the prop a bit to shift into forward or reverse (lower unit gears must align) -- nothing wrong with it, if that's what you are running into.
