I found the problem and fixed it, and did not have to remove the engine to do so. Here is how:
1. Drained oil and removed oil pan
2. Removed header, muffler, kickstart lever and foot brake pedal
3. Removed clutch cover (nasty bolts taken care of with an impact wrench set to very low PSI)
4. Removed the larger cir clip (#43) and retaining spring (#24) on the exterior of the motor casing for the kick starter
5. Removed the cir clip inside the engine (#42)on the kickstart shaft - requires 90 degree cir clip pliers
6. Kickstart shaft pulls right out (make sure all parts are there)
Problem: Part #23 - the ratchet guide - was bent and was not completely disengaging the ratchet from the pinion. Additionally, the mating surfaces were rough and marred. I bent the retaining portion back to where it should be, and then polished the mating surfaces for smoother action.
Reinstallation:
As there are springs involved, it is difficult to perform the installation with the engine in the frame. However, there are two very helpful hints that I figured out while attempting it, and the only special tools required are a large and small vice-grip.
#1- when installing the kickstart shaft from the outside of the engine casing, there is nothing that keeps it in place. Therefore, attaching a vice-grip to it and wedging it to the frame works just fine. This could also be done with tape I suppose.
#2 - after all parts go on (except the main return spring), it is impossible to get everything to stay in place to get the cir clip back on inside the engine. To solve this, simply install everything except the last washer and cir clip (#29 and 42), then affix a small vice grip on the shaft in-between the gap on the retainer bracket (#23). This holds everything in place and allows you to install the smaller cir clip easily (if laying under a bike getting oil drips on your face is easy).
Long story short, it was a difficult fix to try and figure out for the first time. However, it would easy if I had to do it again. I don't know if anyone else has had a problem like this, but if they do, it can be fixed.
Remember to get new oil pan and clutch cover gaskets - they are not reusable and you're dead in the water if you forget to order them (heh).
-Mike