This sounds like a output problem to the transfer case. By chance did you check the sprag(overrunning clutch)? When they go bad they spin in the case or crack it. Looks like this, This one is a bolt in to keep it from spinning in the case.

 

So, dropped the pan and swapped out the pressure solinoid. It still isn't moving. Checked the govoner on the diagnostic tool and it seems to be running correctly. Not quite sure where to go from here.
I put the old transfer case on with ge new transmission, don't know if that could make the difference. I also used the other torque converter. These are 96 parts going into a 97. So the motor and transmission are 96 and the transfer case and torque converter are 97 parts.

 

Those years it shouldn't matter, they would be the same anyway. Put the rear up on jack stands, (block the fronts.....) Trans in park, engine off, can you turn the rear driveshaft by hand?