Yes, that's it.
None of the sensors on the FZJ80 contain microprocessors that I'm aware of. But they all emit some type of signal that varies with some aspect of engine operation. The simplest is the coolant sensor. It's essentially a variable resistor whose value depends on temperature. If you look on page EG-166 of the 1997 FSM there's a graph of the resistance value versus temperature. The value ranges from about 20 kilo-ohms at -20°F down to about 200 ohms at 212°F. One terminal on the sensor is connected to vehicle ground and the other goes to one the ECU inputs and is used, along with other sensor inputs, to control how the engine behaves depending on coolant temperature. The EGR temperature sensor works similarly.
As engine technology has advanced over the years, more and more sensors have been added. Off the top of my head, the FZJ80 has a throttle position sensor, a mass air flow sensor, an air intake temperature sensor, the aforementioned coolant and EGR temperature sensors, crankshaft and camshaft position sensors, 2 knock sensors, 2 oxygen sensors, 2 speed sensors, and a A/T temperature sensor. The ECU uses all of these as inputs to sophisticated algorithms executing in the ECU to control things like when and for how long each injector is open for, when the ignition coil fires so that it can advance or retarding the timing, how much to open the idle air control valve, what speed (high or low) the fuel pump runs at, when to open or close the EGR valve, etc. And the ECU also decides when somethings is not working right (like a sensor input that is out of range) so it can turn on the Check Engine lamp and throw an OBD-II code.
Yes, you got it. The #1 vehicle speed sensor generates a series of pulses the frequency of which varies with vehicle speed and this signal is both displayed on the combination meter and serves as an input to the ECU. The "Yellow Box" gets connected between the speed sensor and the combination meter as shown in your diagram. The circuitry in the box then just divides the pulse frequency by the ratio you set it to. So, for example, if the ratio is set to 1.042 and the sensor is sending 50 pulses per second into the box, the box outputs 50 / 1.042 = 47.98 pulses per second and this modified signal is what then gets sent to the combination meter and ECU. I don't know if it's still sold, but Slee Off Road used to sell a small plastic gear that you would replace your stock transfer case speedometer gear with. It had a different number of teeth than the stock speedo gear and thus would effectively also decrease the pulse frequency sent by the speed sensor. The Yellow Box is more effective because you can choose any number of different ratios, but Slee's gear worked on the same principle only doing it mechanically instead of electronically.