Nitro, thanks for taking the time to write all this up! I think this will help many people, including myself. I spent much of yesterday thinking about how the shift unit functions and realized my misunderstanding was thinking that the spur gears are locked together, which I realize now (of course) they are not! Everything on the external shift unit was set just right, and shifting to second worked perfectly up until the moment this problem occurred. So like you said, I started thinking about the internal shift unit. I was one of those that never could get it to shift to 3rd, so a few months back I took apart the tranny and tried a suggestion that was posted on CEN's forum, which was to shim the shoes apart with washers. I followed the manual (which matches your directions) to tighten the set screws. Still it never shifted to 3rd, but it has been ok in 1st and 2nd for a gallon of fuel. So... last night, when I peeked through the tranny access hole and used a screwdriver to check the internal clutch shoes spring tension, sure enough the clutch shoes were so loose you could swivel the shoes about 30 degrees without the bell moving. So I started thinking that all the screws (including the set screws) loosened a bit and when 2nd engages, 3rd is also trying to engage (or maybe 3rd is engaging first) and the hub is simply spinning inside the shoes. But this still wouldn't freewheel the drivetrain, because the hub and shaft would still be spinning via the larger spur gear on the internal shift unit. There must be something else inside the tranny that is disengaging when the shift to 3rd happens. Unfortunately, I won't be able to disassemble the tranny for a few days, but I am anxious to solve this problem!