Model 18 Valves

you should have some oil up there. If the push rod seal fails you will see oil dribbling down the tubes.

What is that 1/2 moon shape item in there ?.

On the 38-46 engines, lubrication to the valves is by oil mist (personally I think this should be spelt " missed ") coming up the push rod tubes. If i remove my valve adjustment cover,  there is a little oil around the gasket but not a lot. In my personal opinion (I'm sure other  people with this model may have different views) the amount of oil mist will depend upon how much oil is within the timing gear chamber and how the engine breathes. The former is controlled partially by the pressure relief valve in the timing cover. The latter is controlled by a breather valve on the left crankcase, just behind the inner primary chain case.
The figure of eight shaped seal on the push rod tubes sits in a similarly shaped recess in the rocker box and cover. The flanges of this are very thin and are known getting damaged. I suspect that the upper flange on yours is damaged and this is why the seal is lifting upwards. They can be repaired by competent welding and re-machining. I have recently picked up a damaged one as a spare and repaired it. 

The breather looks correct. In the union that goes into the crankcase, there should be a ball valve.
With regard to the play on the shafts, I would rather that than too tight, especially with the low lubrication. Franks book on the subject says that endfloat should be minimal and can be shimmed. I shimmed mine and the reduction in top end clatter was noticeable. 
On my engine, the previous owner had drilled and tapped a 2BA hole into each valve spring chamber so he could squirt a bit of extra oil in occasionally. I ran the engine with these screws removed and the pumping effect into these chambers was quite surprising. 

You can check the breather operation by pushing some plastic tube over the breather pipe and sucking and blowing - you should be able to suck out, but not blow in.
John

Looking at the engine number it looks like your bottom end is post 1960. Would this have any bearing on the oil issues?

Hi Mathew, one method of improving the oil mist to the valves is to put a breather on the exhaust near-side of the rockerbox. This will give a constant air (and oil) flow over the exhaust valve which is where the oil is most needed, the inlet usually gets enough as it runs cooler.
Hi Simon, the engine number is correct for 1938. When production re-started after WW2 the numbers also re-started at 1001 with the relevant prefix for year and model. For 1960 the numbers had gone full circle and back up to 85000+ and these engines will have the alternator type crankcases.

Thankyou Richard. I did actually twig the lack of alternator fixings after I posted. But I was still confused about the numbering, you are constantly learning with these old bikes.

Hi Mathew,
No, sorry I don't have any photos of this mod as it was many years ago before digital cameras. The best place is the flat section on the nearside of the lower seperate section of the rocker box. You should have enough area to drill and tap a 1/4 inch BSP hole to take a 90 degree brass elbow which will keep the pipe close to the top frame tube. This can then be led down the rear down tube and fitted along-side the crankcase breather pipe. The crankcase breather does not have enough flow at higher revs, so the rockerbox breather will help with this.
I have attached a photo of my 1948 Model 18 vintage racer with the later engine which shows extra breathers needed when running at maximum revs.