Joe,
That is the bypass valve that is supposed to open and allow oil to flow past the filter in the event of a blockage in the filter or high pressure due to a very cold engine. The nominal pressure for the engine is 14 PSI but as far as I know, there is no published procedure on how to make the adjustment to the valve.
My personal opinion is that the bypass valve is counter productive because if you have a blockage in the filter it means that a lot of junk is going to be allowed to bypass the filter and go into the engine. Also, when the valve opens due to thick oil in a cold engine it will increase the flow of oil in the sump screen leading to a hole in the screen, which is almost a universal occurrence.
My answer to this dilemma was to remove the ball and spring and replace it with a threaded stud that blocks the bypass completely because I think that allowing dirty oil past the filter does not make any sense, especially since the rationale for doing so is to "save the engine" from damage caused by no oil. Yeh, great......let's save the engine by allowing contaminated oil to flow freely into the innards of the engine!
I also installed an oil pressure gage so I can see if there is ever a blockage and shut the engine down, but not allow contaminated oil to flow into the engine.
I think that the other advantage to not having the bypass valve is the reduction in flow of very cold thick oil that puts a hole in the sump screen. I did this mod on my '78/E and ran it for 15 years and 60,000 miles with out holing the sump screen. I now have the same arrangement on my '81/H.
You should in any event warm the engine up completely before exceeding 2,000 RPM to keep the flow of cold thick oil from holing the sump filter.
You probably didn't expect this long an answer to a simple question....sorry...it's one of my pet subjects on the XS650.
