ok.... my two cents
yup...this frame is toast!!
I am sure glad you noticed your frame, this way and not at 30 mph!!
on all my builds..... I put both rubber circles inside the spokes. the inside of my sprockets go all the way on the hub...up against the spokes. I have never had a problem, mounting my sprockets this way. this will move your chain in...closer to your wheel, to give you more clearance.
also....if your rear sprocket has off-set teeth....you can flip-flop it for clearance for the stays, or the tire....but alignment to the engine is most important.
and....all my HT's came with narrower front sprockets & use standard, single speed, bicycle chain.