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How to fit the form seal between the pump parts on a K3.99 pressure washer?

I am reassembling the two parts of the pump and the seal appears to be able to fit in one of two ways - stretched over the lip on the cylinder head or inside the lip. Which is it?

If inside, how is it retained in place while bolting everything up?
molediver, March 2011
http://lawnandgarden.manualsonline.com/manuals/mfg/karcher/k_399_m.html

ken, March 2011