Ok, now that we've got most of the engine issues fixed, the transmision was looked at again. To do this, everything had to be disassembled again. Cock, I wish the transaxle had some kinda removable sump or something we can see everything from.
On disassembly, the transmission fluid looked really bad, it wasn't too long ago fresh fluid was stuck in, but it was now a milky grey colour, not good. Further teardown showed us what the problem was. Take a look at the picture below.
The 4th gear was broken, this was due to the snap ring falling off the end of the pinion shaft, we have the spring type of spacer between 3rd and 4th gear, the broken snapring caused the spring to push 4th gear out of mesh and chewed up the gear, this is also the fine toothed 4th gear, so I guess it couldn't stand the abuse, not likely the coarse toothed one would've lasted too long either.
A look on TheSamba's classifieds led me to this guy.
He has bunch of good used parts, and has a whole lot more experience with VW transaxles than all of us here put together, probably. Got a set of coarse toothed 4th gear from him.
This will also probably also solve our popout problem, because as I've found out, the popout is from the engagement teeth on the gear hub itself being worn (very little to do with detents as we've thought previously). The wear especially on the flanks, will cause the gear to push the slider out of engagement. The sliders themselves can be worn also, to check this, we had the entire assembly pressed out. The flank cut in the slider looks ok to my untrained eye, so we only got the gears.