Pulled the transfer case. Not locked up. Can switch through 4wd and 2wd and such. Seems in working order.

Transmission is off now but did not grind when going into park or any other gear.
No metal in fluid but was very brown and smelled odd.

---AutoMerged DoublePost---

OD light not flashing

 

Found the problem...Rear axle is done...

 

this get fixed?

 

there is a cluster of packs, as soon as drop the pan, they are right there, those can cause your trans to do what your are talking about, they are around 400.00 for the whole set.

 

Rear axle was the problem. If anyone wants to see pictures they are in my "Bad knock and jerk" thread. New axle is on its way. Thanks for everyone's help.