On your shifting, make sure you've accurately set the indicator rod properly (flats just coming out of the axle in 2nd gear), before you worry about the internals. I've noticed the adjustment is very fine and just being 1/4 turn off can make shifting very difficult.

If it is shifting smoothly but you are only getting 2 gears it might be time to delve into the hub, which is a lot easier than it looks. When I was young I could never bring myself to trying to take it apart (it seemed to me to be as complex as a car's automatic transmission), but I finally gave it a try a few years back and they really are a pleasure to work on. Check out the numerous resources online before you start (especially youtube which has an excellent disassembly video).

Good Luck!
Mark