Problem with Iwata thread & the airhose

I just looked at my Iwata and mine doesn't screw entirely up the threads either... try pressuring up the hose and see if there is a leak.  This is probably normal.. (the fact it only goes halfway up or so)

after fiddling with mine I realized it goes a bit more than halfway up.  When you posted the question I went and took the pistol grip water trap off the brush and screwed it directly on the brush.  Some teflon tape was still on the threads and kept it from going all the way.  BUT after removing the offending teflon tape I still had about 3 threads showing when fully sealed.  So you are probably ok as long as it doesn't leak when you pressure up.

Good luck!