What is wrong with this driveshaft?

it looks like the hose needs to be further up the collar and the tightend down right. It also looks like the packing gland is all of the way off and should be threaded down more.

Remove the set screws in the safety collar (that top stainless steel piece). Loosen those hose clamps. (Id take two of the four clamps completely off. Push that bottom bra$$ piece down as far as it will go and tighen the hose clamps so that the hose is held over the lips. I'd also take a wire brush to the bra$$ and clean it up.
Call Discount Inboard Marine and tell them you need some Shaft Packing. They can help you get the correct size. Look up inside the top bra$$ piece and remove the old packing and replace it with the new. Screw the top piece down on the bottom piece. Put the set screws back in the saftey collor and tighten.
Put the boat in the water and tighten the packing nut (the top bra$$ nut) with a pipe wrench until water stops dripping. You'll probably need two wrenchs.
If you get the flax packing, adjust the nut to the point where you have one drop every 13 seconds with the boat idleing in gear. If you go with the drippless, tighten it so there is no water dripping but the shaft stays cool while running.
I can't tell from the picture, but there should be a back up nut that you snug up on the packing nut to keep it from coming loose.

call chris at mid-ohio in Streetsboro, he should have packing there 330-626-9115,they are on rt 14,

Thanks Jim, really appreciate the help.

Eric, man you are resourcefull! Phone numbers and all. Thanks. Should I tell them you sent me?

I am going to get a list of things I am going to need and go up there this week. I mapquested it, only 10 mile from work.

Take it out and just put a PSS seal in there. Do it ONCE and be done!

Glad it's running for you. If you use the flax packing, it needs to drip one drop every 13 seconds to cool the shaft. It should be getting warm. I use the Gortex dripless packing.
Behindpropeller is right, at some point you may want to go with a dripless seal like the PPS. But get it running fine and enjoy it for a while first. You can dive into something like that over the winter.
A word of warning, kids would rather be skiing than watching you work on it.

The "dripless seal like PPS" comment was to replace the whole thing. I wouldn't worry about that now. I wouldn't even worry about the Gortex. I'd just back the packing nut out a little until the drops fall at the correct rate. The only thing is you'll need to check it from time to time as it wears and you need to run the bildge (and not live the boat sitting the water unatttended for days at a time). Judging from the look of the thing, they were trying to stop it from leaking and all they need to do was replace/adjust the packing.
To replace the whole seal, you'll need to pull the shaft. I'd wait until you hit something and have to check the shaft to make sure it's not bent or the strut bearings need replacing. I'd plan on doing all the following at once:
--Pull prop and get it resurfaced if needed
--Pull rutter and replace packing
--Pull drive shaft, make sure it's true
--Replace Strut Bearings
--Replace the seal
--Check the shaft log to be sure it is firmly attached and doesn't need reinforcing
Like a say, do this one winter day when you've got cabin fever and several hundered bucks to spend. Maybe not even this winter.

The drip in the packing is for packing lubrication and cooling (vs shaft). If it didn't have the cooling it could smoke the packing. The packing will look 'glazed'. Same principle as most pump shafts that have packing. On pumps the packing is adjusted with the pump in operation until slight leakage is present.