FIXED!!!
Well it turns out it may have been one little thing, or a combination of issues all working against me! I guess that's what you get buying a used bike with unknown history.
Today after I readjusted the floats again, the bike seemed better, but I still was getting some oil/fuel in the black drain tube at the bottom of the bike. I decided since I've done a number of test runs that I should change the contaminated oil. I planned on doing this right away, however I didn't want to change it and then recontaminate it with flooded fuel.
Looking into the sight glass the oil level was full. As I removed the drain bolt, I couldn't believe my eyes. I would guess AT LEAST 2.5-3 quarts came out. Either someone didn't know what they were doing and decided to fill the bike full of oil, or that much fuel had gotten into the crankcase initially with the flooding issues. Either way after filling the bike to the mid point between the two lines on the sight glass, I took it out again.
This time not only did the bike fire right up, it sounded crisper, idled smoother, and even after being warm, the idle would stay at the same point, previously it would slowly get lower until it started to foul/act up.
I put about 10 miles on it so far at city speeds to highway speeds. It starts right up when warm, (before it wouldn't), and now the only issue I have is a small occasional backfire when I have a hard downshift/slow down.
In conclusion, maybe it was to much oil in the first place causing all the issues? Maybe the needle/seat were leaking also as the new one did seem to help, maybe it was the ultra loose spark plug I found that lowered compression slightly making hard starts? Who knows, all I know is I now have a good running and good looking S40 with only 1600 miles on the clock!
Thanks for all the help and input everyone!
Aaron