1970 914 1.7 L:
When replacing the Flywheel needle rolling bearing what is the preferred depth ? There is a felt washer that gets sandwiched between the race of the needle bearing and the locking washer.Click to view attachment
Should the race be flush with the out side of the flywheel so the felt washer gets smashed or do you recess the race 1-2 mm in to accommodate the washer so it doesn't get distorted ?Click to view attachment.
Also the needle bearing two race surfaces are slightly different. One side is "fatter" the other side is more narrow. Does the race direction matter ?

Click to view attachment

From the workshop manual.

Thanks Mat: Any input about the race surface direction ?
Here is the other side of the race currently pressed on the inside of the flywheel.
Click to view attachment

Yes, the 'narrow' side faces out.

Yo !
Mark and Mats. Thanks[size=7].
Flywheel, clutch plate, pressure plate and Tranny back on in 30 minutes from now !!!!

How necessary is the felt washer?

Not to be too rude but....
It's not for decoration.

The thing is the engine runs hot enough that the grease on the pilot bearing can melt, so without the felt fasher it can leak past and contaminate your clutch disc.

The needle bearing should have grease packed into it and then a thin layer of a quality hi-heat grease on the surface. Like wheel bearings you do not fill the whole space with grease.

Also note the OP does have a new flywheel Oring installed, forgetting to do this is a common rookie mistake when replacing the main seal.
The Oring has a graphite coating do not clean this off before installation.
Also put a hair of grease on the main seal surface so the seal doesn't burn on start-up.