Mark,
In reading Junk's post I realized I was not real clear. Sometimes I make assumptions. The dial indicator has a plunger that works in and out and indicates the difference in thousandths (US) by watching the gauge. It has a magnetic base that has a switch type affair to lock it down. It is good for finding out of round, runout, backlash, and I use it for centering things in a lathe (especially with a four jaw chuck). For the backlash, as you rock the ring gear back and forth, the plunger moves in and out, and you can determine the difference of the freeplay (backlash) by the gauge. Also, you can check to make sure the ring gear is running true by letting the indicator run on the flat side of ring gear as you turn it. FWIW, I heat the ring gear a bit with a propane torch when installing it to get it to expand. Similar to putting a new ring gear on a flywheel if you are familiar with that.
Ali,
When I am first doing the pinion depth I don't use a crush sleeve. IIRC, the torque on the pinion nut and new bearings is something like 13 in. lbs. for the setup so things can be held by hand when tightening.
This will assume a 97 rear with a diff lock. I wrote in another thread how I determine the side shim thickness for the backlash. I have found that once the backlash is determined, it does not change much in setting up the pinion depth. Using the top pic as a starting point, I would put on the side bearing caps and torque them down. You have to hold the plywood (I do it with my knees against the edges) and pull the torque parallel to the bearing caps for a mechanical advantage. Gear paint, toothpaste, or Lithium grease a few of the ring gear teeth. I then use a crow bar or similar to hold pressure against the ring gear for a load and through the bucket side hole, turn the pinion flange around, back and forth, etc. to get a pattern on the drive and coast sides of the ring gear.
To make pinion shim/washer changes I then rattle gun the bearing caps off, tap one side shim out on one side, then lift out the ring gear/spiders. Next, I lift out the third member housing (carrier) from the plywood hole and flip it over. I loosen the pinion nut which as I said is not very tight. In the bottom of the bucket I have a pile of rags. With a wooden block against the pinion nut end, I drive out the pinion till it falls into the rags in the bucket. Over to the press. Press off the rear pinion bearing, replace different thickness shim/washer, press bearing back on. Reinstall pinion with flange and repeat procedure.
After everything is correct, I install the crush sleeve (bearing spacer). I use the tool I made to hold the pinion flange for this (or you could use a large pipe wrench). It helps to clamp down the third member to a workbench or such as it takes quite a bit of torque to crush the sleeve. Slowly creep up on the torque/preload/backlash. If you go too much, you have to install a new crush sleeve.
Disclaimer – this is just the way I did this, mostly to explain how the plywood and bucket fits in, and most of it is just from memory. I did quite a bit of this in the drag racing days, as any time the tire diameter changed, motor RPM’s changed, then so to did the ring and pinion need changed. Hope it is of some help to you.
Bill
For the front, two dial indicators make things easier, but certainly not required. With one you have to move it from checking the backlash to putting side pressure on, then back to checking the backlash again. No big deal. 
