Jacque...
Haven't done what you intend, but here's some thoughts:
Do drop the rudder to make it easier to remove the shaft with the prop still attached.
With the shaft out, make sure it is "true", and not having a ever-so-slight bend in the shaft log area.
Unless the strut is loose, don't mess with it, but do consider replacing the cutlass bearing while the shaft is out.
If the shaft wore the stern tube ovoid, you may want to re-glass/reinforce that whole area after removing the old stern tube shaft log assembly.
Check all four motor mounts for softness. Replace all four if there's any doubt.
You said the engine was mounted at the top of the mounts. Given that, am trying to figure out how there could have been a misalignment that allowed the shaft to eat up the lower portion of the stern tube. The amount of damage is huge IMHO.
Motor alignment is done with the shaft uncoupled from the trans after the shaft, cutlass bearing and shaft log are all installed and in-place. The coupling plates must be aligned with a feeler gauge wiith no spacing difference top/bottom/left/right. So, having the engine sitting at the top of its mounts doesn't make sense unless the mounts were replaced and the engine wasn't realigned.
The strut would be a pivot point of a degree either way, but it would seem that the cutlass bearing would show some unusual ovaling too, at thefront and back, if the shaft was misaligned low at the stern tube. This seems inconsistant if the engine was at the top of each motor mounting.
Final thought: It sounds like the motor mounts were replaced with the wrong ones and the engine couldn't be raised high enough to get a proper alignment. The ones used apparently didn't have enough thread height to get the engine to the proper height.