Hey DW...I know that bald spot!
I've done (and continue to do) lots of AAM-7 work. I know shops that charge $1500 for a rebuild and they often don't know what they're doing (including dealers). There is nothing particularly special about setting one up, except that they seem to be exceptionally finicky about tolerances and specs. On a Dana or Corp differential...there is a wider range of acceptable specs. Plus these axles have some "over-design" built into them, so they last longer even when "just close". But on the AAM-7...it needs to be dead-on in every aspect, if you want it to have a chance for survival. This is because it's grossly under-sized for the vehicle and its already at its limit with stock 32"s and soccer-mom duty. Big tires & off-road use just compound the problem. Pinion preload is often low or missing entirely on pretty much every one I work on...so your problem is very common. Remember, for every 1 revolution of the wheels...there are 4.56 revolutions of the pinion, so its no surprise the pinion bearings often fail before 70K miles. If you have been driving around with a loose pinion bearing...the ring & pinion are probably junk. The pinion moving fore & aft will wear the teeth sharp, and this makes it very difficult to get a good pattern, even with all new bearings and a proper set-up.
Due to the tiny size and light weight...the AAM-7 is actually very UPS-friendly, and it can easily be shipped for around $65. Feel free to ship it over for a rebuild, if you cannot find a reputable place locally....$250 plus parts. I don't recommend driving over simply because you'll want to slowly break-in the new gears upon start-up. New gears should be put through several hot-cold cycles, in start-stop conditions...preferably in 20 to 30 minute increments, at least for the first 200-300 miles. Hitting the highway for a 4-hour roadtrip on brand new gears can sometimes cause heat and wear problems.
EDIT: Also I can put some urethane bushings in the outboard mounts, if you haven't done so yet.
