Not sure why this is happening?

When I bought my truck the passenger side halfshaft would pop completley out causing the 4wd not to work.  I figured the c-ring clip on the end of the shaft was missing so I pulled it apart to my surprise it was there and in good shape?  I went ahead and installed a new one and popped it back in but it seems to not click in like I would expect even though the shaft is completely pushed in all the way. It only takes a small tug by hand to pull it out again.

Now the shaft seems to only pop back out in 2wd or at higher 4wd speeds, though it doesn't pull out all the way like before causing the 4wd to disable, but enough to chew up the diff seal and cause fluid to drip out.

What could possibly be going wrong here?  Why is the c-ring clip not holding?

Any thoughts would be awesome!
Thank you!

Specs on my truck:

1996 Tracker
31x9.5's A/T
2" Calmini Suspension lift
CV joints appear to be in good shape

Oh yeh, when the shaft is pushed in and the hubs are locked and 4wd is on, I am not able to pull the shaft out by hand...

Odd. Maybe the last owner changed out that axle and put the wrong one in and it's not long enough. But that'd be thinking outside the box. Jack it up so that the A-arm is completely extended downward and check if it comes loose like that.

it appears to be the correct shaft.  For some reason it just doesn't want to stay put?  Could something be going on inside the diff that is causing the ring to not work like it is supposed to?  Maybe my cv joint is bad?  It flexes in and out... Should it be loose or tight? 
I am going nuts!

It could be that the circlip groove inside the diff is worn or damaged. Are you sure that the circlip is the correct size and wire gauge?