Many old headsets didn't have seals there. Keep the area clean, don't stuff too much grease in there (that attracts dirt), and overhaul it very year or two. It'll be fine.

A trick I used to do on mountain bikes is cut about 3/4" section of old MTB tube and slide it/roll it onto the headtube/lower cup before inserting fork. Then fit it over the gap after fork is installed. That'll keep the headset from getting a direct blast of road muck.

There's also a ready-made version if you prefer.

Such precaution is only really necessary if you ride in the rain or dirt a lot without a front fender, though.

Noted

Also:
http://farm8.staticflickr.com/7243/7...be271a44_c.jpg
http://farm9.staticflickr.com/8168/7...17837bd6e9.jpg
That's the axle from my back hub. I took it out, cleaned it and the ball bearings, and attempted to reassemble. However the "large circle thing" doesn't fit flush (with or without the ball bearings). Looking at my axle right now, it looks irreparably damaged. Thoughts?

That dust seal can probably be pushed onto the cone a little more. The seal may be damaged or simply out of place.

You can try putting the short end of the axle into a 20mm or so socket facing up on the floor, then hammering the long end of the axle, that might help coax the seal back into place. It should be much closer to the bearing surfaces of the cone.

Tough to say what all that wear on the outter part of the cone is. Kinda odd.

No sign of axle damage in the pics that I can see.

That is the non drive side part of the axle btw. I think the damage on the outer part of the cone is me over torquing the nut, causing the dust cap to kinda fuse into the cone. I was trying to get the dust cap to fit flush with the hub with the bearings inside but it just wouldn't. Now I can't remove the cone, dust cap, or nut.

This can cause major problems if he put the keyed washer between the bearings and adjustable cup. The bearings will be rolling on the washer instead of the proper races. Take a look at the picture again:

http://sheldonbrown.com/images/382px...ed_view-en.jpg

Note the top three components. First comes the adjustable cup, then the washer, then the locknut. The function of the washer is to allow you to really crank down on the locknut without spinning the adjustable cup and messing up the bearing-preload. Nicer headsets have hex shape to allow you to use two headset wrenches. One to hold the adjustable cup steady while you really crank down on the locknut. Actually, it's best to unscrew the adjustable cup UP into the locknut that you are tightening DOWN.This really locks them together.