The intruding fuzzy stuff in the center tube from the seal would be a "deal breaker" if that is how it came out when removed.
That was most likely caused by installing or removing the filter, I'd guess install judging by its direction. It doesn't get like that under normal use. It's also nothing to worry about since almost all of these cartridge filters sit against a flat bottom and very little oil reaches even the outside of that seal.
If end with the frayed "fuzzy stuff" went over the center tube first when it was installed, there was nothing to stop any loose fragments from going into the engine.
The XG10358 for 1.8L Toyotas (including mine) is similarly constructed, except that it lacks the felt seal on the ends. That eliminates any risk of loose fuzzy bits going where they shouldn't, but may not seal against bypassing oil as effectively if the filter geometry is not perfect.
Anyway, we need more posts of cartridge filters, especially since they're easier than spin-ons to dissect.