Is this flywheel shot?
 

I have 2 bad areas on my flywheel. It appears the bendix on the starter was not sliding all the way out every time. Only twice in the last 6 months did I get noise when starting. I have the tranny out now and am trying to decide if I want to spend $200 for a used one or keep on going with this one. Thanks.

To keep the terminology proper, the pics you posted are of a ring gear that has been removed from the flywheel and not an actual flywheel.

The teeth are too worn to reuse and given you already pounded it off the flywheel just replace it as each time the gear is pounded off, it scrapes off metal and will eventually result in a loose gear. When replacing a ring gear it needs to be heated then dropped onto the flywheel to avoid install difficulties.

When an engine is shut off, it more often than not comes to a stop against cylinder compression. This leads to certain spots where the starter is engaging the flywheel at the beginning of cranking, this is what is causing the wear. ( A 4 cyl has 2 spots , 6 has 3 and 8 has 4. )

Given the teeth are not chamfered, you might be able to grind the welds off the crank sensor ring then flip the ring gear over. I'd take a close look at automatic flex plates to see if the ring gear is the same, you might be able to grind the center welds off and just use the gear.

There is a more complicated than you would think sequence of events when cranking an engine:

Power is applied to the cranking terminal of the starter solenoid. This first passes through a high current pull in winding ( few but thick turns ) of the solenoid then to the starter motor. Two things happen here, a strong magnetic field produced my the solenoid pulls the starter drive gear into the ring gear and ,since the other end of the winding is electrically connected to the starter motor, the starter motor slowly turns assisting gear engagement.

After the gears have fully meshed, the solenoid contacts close bypassing the pull in winding and applying full power to the starter motor. There is a low current hold in winding that is always in the circuit during cranking that keeps the starter gear engaged.

As ring gear and starter teeth wear, this timing is upset causing the starter to begin turning too soon relative tooth engagement adding to more rapid wear and eventually grinding during cranking.

Great explanation 97 SL320!

Ring Gear question - part II
 

Thanks for the information. I went ahead and replaced the ring gear with a used one in very good condition. Now the crankshaft position sensor is pushing against it (my old ring gear had some decent wear and this new one does not have much). It's so tight against it, I cannot even turn my crank by hand. When I removed it, my crank turns fine. Will the position sensor "wear down" to accommodate the thicker new ring gear? I do not see any way to adjust the position of the sensor. Thanks.

There isn't any contact between the crank sensor and anything else.

Is the sensor contacting the sheet metal wings or the ring gear teeth? If the sensor is contacting the teeth, the ring is miss positioned or on upside down. The sheet metal wings should face towards the engine and the ring gear teeth towards the trans.

It would help if we knew what kind of car you are working on.