Okay my post did not covered the complete working of the system but the main point was that the diode isolates the neutral light from the clutch switch.This is incorrect Ken. After I screwed up the post, I figured I'd correct your mistake as well.
Ignition power comes in on the y/r wire. It finds it's ground on the g/r.
It has two paths to ground.
1) through the clutch switch
2) through the neutral switch.
The diode is in direct path for the neutral switch. If the diode were missing, or open, the bike would not start in neutral and the neutral light would not illuminate.
It does keep the light from coming on when the clutch is engaged, but it is crucial component in the starting system.