i'm no expert but here's my opinion: the way a motorcycle transmission works is different from a car's. motorcycles are "constant mesh", meaning that all gears are spinning at the same time. instead of the gears sliding to engage, a set of "dogs" on a plate slide into holes on the gear to engage that gear to the output shaft.

image taken from http://www.vf750fd.com/blurbs/shifting.html

so basically, the gears don't grind, the dogs do. your dogs could be worn out, in which case you should give them some water and a treat and a nap  
or your holes could be elongated/beveled, and if that's the case, you should see a doctor  

honestly, this is probably worst case scenario, but unlikely. worth considering though and would explain the grinding sound. also if you clutch doesn't completely disengage, it would explain the grinding between 1 & 2. it will try to go into neutral between them. if the idle/engine speed is too high, it would be hard to shift out of neutral from a stop (high engine speed can't match low road speed), as the little dogs would skip over the holes too fast to engage.

lots to consider. GOOD LUCK!

Ok, I've adjusted one spline tonight which "seems" to make it shift better.  I didn't have too much time before it got dark and can hopefully ride a bit more tomorrow.  The issue now is that the height of the shift lever is almost too high, I have to use the top of my foot, almost up to the ankle in order to shift.  Is there a way to lower the shift lever again without changing the spline adjustment I just made?

Sounds like my bike.  I have s40 2007.

Mine don't like to shift out of N when stopped.  My instructor told me that it is normal.

When shifting to first moving to fast, going into first gear makes sound like gears hitting.  I thought that was normal... I try to match my ground speed to gear speed before shifting.  Only seem to make that sound if I am going much faster than where ground speed and gear speed is not matching.

How much can you move the clutch lever before its starting to actually disengage the clutch?

you're gonna need to get down there to see which way the threads go.
yeah, 10mm I think.

The problem is that the clutch lever travel is needed for the clutch to engage/disengage properly. There isn't much to adjust. The free play at the knubby end of the lever should be about 1/2" or between 10mm and 15mm.