904 Torqueflight heavy duty selector shaft seal height?

The HD seal is installed at the right height. One pic shows your E-clip coming off the kd shaft. It probably popped all the way off when yopu pushed the kd arm onto it and it dropped down inside. That flat part of the kd shaft is supposed to be facing the driver side. It's facing forward in the pic. Remove clip; push down; turn counterclockwise 90 degrees; pull it back up and reinstall the clip. Make sure it's clocked right inside and moves the innards correctly. You'll be able to feel it; loose at first then pressing harder against a spring resistance as you push the arm back.