Well the results are in. Built up the worn area where the ring gear goes on the shaft, machined down the Duralloy, installed the gear (heated to about 200 deg F. & is .002" interference fit), removed gear three days later and the stuff held up and stayed on the shaft. So far so good. We'll see how it does after sitting in gear oil for a year or so.
As far as the seal area goes, I suppose it is possible to sleeve the shaft but the machining gets tricky as the area in question leads immediately into the prop taper area. The seals are one of a kind. They are called a "syntron seal," they only come in one size and are shaped sort of like a cone (they are also $150.00 ea.). I wind up removing and overhauling these drive units every 9-14 months. The tugs they are in see excessive use (2000 - 3000 hrs/year). So time will tell.
It is the old cost effectiveness thing that is driving this. This is the lowest cost repair method. New shafts are a couple grand and 6 to 12 months out, and having a real inside machinist and shop do this isn't much cheaper (I'm a diesel mechanic with basic lathe skills). I have heard of something called "flame spraying" where you build up the worn area with like metal and remachine. I would like to try that but the boss gave me this stuff.
Vince