Just a quick note on how this works,
Side stand and Neutral switches.
The side stand in the up position a switch closes and sends an earth through a diode
(1) via the ignition switch to the Ignitor, wiithout this earth the Ignitor will not fire the plugs.
With the side stand down the earth which operates the neutral light switch, is now used instead to keep the bike running, when the bike is in neutral an earth is sent through a different diode
(2) via the same circuit in the Iginition switch to the ignitor.
The neutral light operates through a different diode
(3) to prevent back feeding 12volts to the starter cut out circuit.
But this is only part of the setup
These earths are also sent to the Starter cut out relay and without one of these earths the starter cut relay will not operate and the Starter solonoid will not operate therefore starter motor will not turn.
Therefore with the bike in gear and the sidestand down these earth are missing bike will not start even if you try bump starting it with the side stand down it will not start.
Starter solonoid and Starter cut out relayWhen the bike is in neutral the earth is sent through a different diode
(4) to the starter cut out relay thus operating the starter cut out relay which in turn allows the Starter Solonoid to operate and turn the starter motor.
However with the sidestand up and in gear, when you pull in the clutch lever the clutch switch reroutes the earth from the sidestand switch to the Starter cut out relay and the Starter Solonoid will operate because it bypasses diode
(4)It appears in you case since the Neutral light works and the bike will only start in neutral with the clutch pulled in would appear that diode 4 is knackered.
To test this diode take note of where the Black/Yellow and the Blue wires are connected and put a meter accross these pins and note the reading, now reverse the leads on the pins and note the reading. If the diode is working then you will have continunity or very low resistance one way and no continunity or very very high resistance the other way as the Diode allows current flow in one direction only.
For easy remembering when following wiring diagrams positive flows in direction of the Diode Arrow.
There! now you know
If it is the problem and since these are not repairable and are not a common failure, second hand ones should be easy to come by.
The same one is fitted to the early carburettored R1s, R6s and all the Fazer 1000s.
It is possible the failure was caused by careless removal of the alarm.
See attached Picture