Woohoo! I got it working. There is a bit of a trouble adjusting but I'll do my best to describe what I did.
First I did everything as I said I did ... followed the instructions. I also was missing the ball bearing, so I replaced it (25 cents). The trick is the adjustment ... I don't think the service manual describes it well enough. For me, when I loosened the lock nut that is holding the push rod in place, it would actually turn the push rod. The problem is that that throws off the fine adjustments that you did.
So what I did was take the push rod and the lock nut out of the shaft. Then held the push rod with pliers and tightened the lock nut a couple of turns. I'm sure that was cross threading the rod, but I am pretty desperate.
Once I tightened the lock nut further down the push rod, I reinserted it into the shaft and threaded it back onto the lifter. Then I tightened the lock nut down fairly close close ... then I checked free play. If it was too tight (not enough free play) I would back it out and tighten the lock nut. Eventually I was able to tighten the lock nut and push rod so that I have _more_ free play than ideal.
Then I adjusted the handle by unscrewing the wire from the lever. That made the free play less (did I mention that I had it all the way screwed in to begin with?). In the end I have just a few millimeters of free play before fully engaging the clutch.
I tightened the clutch case back on and gave it a whirl. When I shift from neutral into first it does 'grab' a little, but for sure does not stall or jerk forward. So I think that means I could probably tighten up the handle a bit, but nonetheless it's working.
So only 200$ in parts later, I have my blaster back to where I got it 2 weeks ago! heh ... but it was a good learning experience and hopefully this will help someone else.
Now I have a bit of adjustment to do on the carb I think ... before it's warmed up it seems to die a lot ... it will rev high then die ... but I'll figure that out later.