There are also several accounts in the forums of a mis-assembled circlip: they have a rounded side and a flat side, and must be installed with the rounded side toward the moving gear that it might be contacting. Long ago one of our members had a nice K5 that would drop into gear if parked idling on the sidestand: it turned out that the factory (Honda) had installed it with the flat side toward the C5 (#21, #25 and #8 in the diagram above) and the circlip had climbed out of the groove, letting the C2 slide over into the dogs of C5. After his report, several others here reported similar issues in the other places in the transmission, all due to the same issue: the sharp, flat side of the circlip(s) had been accidentally installed against a rotating gear or spacer. Be sure, when installing any gearset, that any rotating gear with a positioning spacer shim has the rounded edge of the shim/circlip toward the moving gear, only. The circlips are always ground flat on just one side, and for that reason.
Trouble is/was, Honda had moved their experienced SOHC4 assemblers to the CX500 line just about the time of the K4 bikes, which was when these troubles started showing up. This showed up in many ways on these bikes, often as assembly issues. Honda wasn't perfect, but boy, you oughtta see what Suzukis and Yamahas of this same era looked like... 
I'm definitely going to be double checking every dang inch of all the gears now, after reading all this.
Hey Mark, I am curious about the issue I had with the countershaft bearing holder. I'm not sure if you had read that portion mentioned earlier in this thread, but it's pretty much the fact that the bike was stuck in gear and nothing would get it out of gear, that was the 2nd reason for pulling the motor. So when I went to remove the countershaft bearing holder, it would absolutely not budge at all. It took the better part of almost an hour to get it out and when it did the bearing was stuck on the shaft instead of in the holder. And once it was out, I was able to shift the gears and move the gear drum freely as it is supposed to.
Thoughts on this and why I couldn't shift because of it.
Interesting! It might be a clue, too, but you'll have to play Batman here to track it...
First thought: if someone [before you got the bike] had attempted to change the C2 gears in the engine because they wanted the wider step-ratio of the earlier engines, but didn't change BOTH gears (mainshaft AND countershaft) gears), then those 2 gears would be placed about 2mm closer to the tooth-roots of the teeth on the gears. This would make for quite the bind when the tips of the teeth engaged the valleys of the opposing gear. Where I'm going with this (and the new-to-me info that you had the tranny back-cut) is: could one of the gears on one of the shafts (countershaft in this case) be from an earlier engine, by accident? This could put the tips of the larger gear's teeth deep and hard into the valleys of the older gear on the opposite shaft. That would cause the shafts to bind tooth-on-valley in the offending gears when the countershaft bearing is tightened into place. (Reason I know this? Assembling 1 engine from several boxes of "F" and "K" parts, without benefit of a parts manual anywhere near-at-hand, long, long ago - and I/we didn't yet know that the tranny gears had changed between the two engine types...).
Second thought: could the countershaft bearing retainer perchance be from another engine? Honda changed the last 3 digits of this part's number with the F2/K7 engine. At the time I thought it was due to new molds or something, as the parts were much better defined beginning with the F2/K7 engines. I haven't had the opportunity to put them side-by-side to see if there might be something like a depth difference, or the like.
To sleuth this point: not easy, but do-able (I've done it) you put the bearing housing in place with at least 2 screws, then look up thru the oil pan's opening (with magic flashlights and little dental mirrors) to see if you can find dogs-and-slots touching when the tranny is supposed to be in Neutral. In this one, look at those gears that fought each other. If even one dog is touching the inner face of the slotted groove of its mate when in Neutral, then either the dogged gear is wrong (one of the 4 that is involved at that moment) or the slotted gear is out-of-place in space. This can be (in some cases and gears) the slotted one is one backward, or the little snapring-and-spacer thingies are not arranged in the proper order on the shaft.
Third thought: involving those snaprings and spacers - there are also shims used on the mainshaft (not related directly to this shaft's length) on the far side of the engine from here, used to space the mainshaft's gears properly over the countershaft's gears: if those shims or the snapring-spacer sets are not correct then the countershaft's gears' dogs could conceivably become too close to their adjacent gears' slots, making them just barely touch each other when they are supposed to be disengaged. Then, since this is a constant-mesh (somewhere) gearbox, this locks 2 gears on the same shaft into the other shaft, which can definitely make teeth change shape mighty quick-like.
I've been puzzling over this one (wish I was there) a bunch lately. It just "feels" like somewhere the dogs of a gear are too close to the slots of an adjacent gear that is not supposed to be engaged at the time. This can "fit" with the countershaft bearing causing jamming of the countershaft upon tightening if the mis-sequence of the spacer (i.e., it is on the wrong side of the snapring) that is next to the offending gear is pressing that gear against the snapring (or adjacent gear), effectively making the stack-up length of the gearset about 1mm too long. The clearance on the end of the countershaft where it sits against the removable bearing is less than 1mm, so if one of those spacers is wrong, it could explain all 3 symptoms at once? To this end, check the assembled order of the snaprings, spacers, and the orintation of the 2nd gear in from the inner end of the countershaft: it can be in backward, which makes it drag against the first gear that is closest to the center bearing that supports this countershaft. This, too, will push the rest of those gears toward the [removable] bearing in that housing.
See if the bearing will stay in the countershaft's housing: it is supposed to be a 0.001"/0.02mm interference fit, which is: heat up the housing to 100-120 degrees and put the bearing in the freezer for about 10 minutes, then see if the bearing will drop right in. After they cool off together, the bearing should be captured enough that you can't shake it out. If the housing is somehow damaged, twisted, bent (or something) then it will need to be replaced. The most common thing I've seen here is: someone dinged up the inner face of the housing when removing the bearing (simple heat works fine) and then forced the bearing back in, which distorts the housing and tilts the bearing a tiny bit. If it is a tight bearing it will stick or rotate with drag: the easiest 'fix' for this is either an extra-clearance bearing (like the one in the middle of the crankcase) or a new housing.
