Reduction gear set issue

[Maxo]

Ok, so I had been driving my '92 and was getting the flashing power light - solenoid C code, about 95% of the time so after about a month I decided to remove the tail housing and have a look.
After examination it is very evident that my reduction gear set is not in alignment... In other words, the top gear is not flush with the bottom gear as it (the top gear) sits out so that about an 1/8inch of the teeth do contact the lower gear.
I thought that the lower reduction gear was maybe sitting too far in since it looks like it's nearly touching the parking pawl but if that's the case then I have two problems...
Where the upper gear shaft goes into the clutch basket there's a needle bearing and it appears that the upper reduction gear shaft has been extending beyond that bearing and rubbing on the solid metal behind it. There's actually a grove there now. This leads me to believe that the upper reduction gear is not seated all the way.
Any ideas as to what would cause the upper reduction gear to sit further out than it should?
I did replace the front diff, is it possible that the input shaft wasn't inserted correctly and isn't allowing the upper reduction gear shaft to go in far enough?

Any advice would be greatly appreciated.