I think you have succeded in overcrushing the crush sleeve. it'll need to be replaced. Do not drive it like this, if you have overtorqued the pinion preload, you WILL destroy the bearings.
Too many folks seem to think that you can get the same torque by 'aligning' the nut again... wrong. You must reproduce the exact rotational torque to have the same preload on the bearings. (Accounting for drag of new seal, add about 3 inch pounds.) Yes, that requires the axles be pulled out of the diff.
Yup... gear stuff is more exacting than almost anything else on a Jeep.
97 TJ Sport - 4.0/HP D30 w ARB/8.8 w LS/4.88s; 35s and flat fenders on 2.5 lift
84 CJ7; frame off restoration in progress.
The technical advice you get from me here is worth exactly what you paid me for it. Warranty issues will be reimbursed at double what you paid me for the advice.