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Dan, as usual, has the correct answer. If seeing it in the service manual helps ease your mind, here's some info from mine. Note that the earlier stuff does not give a reading for measurement of runout with the wheels installed in the case, that happened later when the pressed flywheel assemblies started slipping, and the chain to gear cam drive conversions came out. If you're getting .0065 at the end though, you can bet it's about the same with the assembly between centers.
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Thanks. I actually have a very similar manual, but somehow glossed over that. Just so I'm clear, is "Runout (shaft at flywheel)" at the pinion shaft where I measured it? Can I measure "Runout (flywheels at rim)" with the flywheels in the case and a dial indicator through the bore, or is that something different?
Runout is measured with the flywheel assembly mounted between centers in the truing stand. The runout is measured as close as possible to the flywheel on each side, pinion and sprocket shaft. This is make sure that both shafts are running true to each other in the bearings, and that the drive gear on the pinion side and the drive sprocket on the sprocket shaft side are running true. Read carefully through the flywheel assembly and truing directions in the manual and study the pics carefully, it will be clear. The only thing that checking it at the end of the pinion with the flywheels mounted in the case can tell you is that it is not true. My question would be, if it is measuring .006 at the end of the pinion shaft, what does the pinion bushing in the nose cone look like? I would think it would have to be trashed.
 

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Can somebody help me understand what I'm missing here? Upon closer inspection I realized that even the picture in my manual of the gearcase cover bushings looks like what I posted, but clearly I don't understand what they mean by pressing them in flush with/against the cover boss.

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You have to read the entire instructions all the way through to get the context. That paragraph tells you to stop pressing the pinion bushing when it is flush in order to start the drill hole for the pin 3/16 deep. Once the hole is started you then press the bushing in the rest of the way, and then finish drilling the hole. This is because the hole is located in the bushing and the boss and if the bushing is all the way in you won't be able to drill the hole in the right place. The cam bushing is pressed in till the shoulder hits and then drilled.
 

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Dan and Jason have good advice here. Pinion shaft bushing clearance is very important. A lesson I learned the hard way. I rebuilt the lower end of my shovel and set everything up to the tight side of the tolerances. The bushings in the cam cover "looked good" so I just bolted it back on. Less than 5,000 miles later, and over 100 miles from home on the way to a friend's house in Iowa, the engine quit running. Roadside diagnostics revealed a broken pinion shaft. (Aside to Dan, Rev Tramp was riding right beside me when this happened.)
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It was a brand new American made part. I figure it broke because there was too much clearance at the bushing allowing the end of the shaft to wiggle back and forth as the cam pushed against it and the bearings were too tight to allow the flywheel end to move. Anyway, lesson learned. Don't do one bearing without addressing all of them. It hadn't been a problem before because the main pinion bearings were worn also so everything was happily slopping around together.

That said, if your runout at the outboard end of the pinion shaft actually is .0065 as you stated in your original post (which is what made me question the pinion bushing to begin with) then a .001 clearance on the bushing is going to cause the same kind of stresses that broke my pinion. You need to carefully check it before you just throw everything back together again. Where are you located? There might be someone local to you who could help.
 
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