I measured the chain by following this tutorial:

http://bicycletutor.com/chain-wear/

I used a tape measure and counted 12 complete links (one inner to one outer). The 12th link lined up within the acceptable perimeters.

Is it possible to have one gear that needs replacing and none of the others? So if the gear is worn I will have to replace the freewheel/cassette ( I don't know which I have)?