Well Jeff, you have the 1-2 shift valve in correctly & it moves smoothly with no hang ups, I can imagine the wrongly located throttle lever you had could well cause other issues within other hydraulic circuits. There's only really one way to find out. Air pressure test the transmission to verify the operation of all actuating components. On page 142 of Carl Monroe's 727 Handbook is the correct procedure for doing this. If the air pressure test checks out ok & you still have an issue, the problem can only be in the VB & not in the hydraulic circuits in the trans case or sealing rings.
