So, I got a friendly call from the service dept at about 5 pm last night. New transfer case is in and still have a clunking sound when in 4 wheel drive. I think maybe they were just guessing that it was a bad transfer case. Now they said that when they pulled the front diff cover off the fluid was a wierd color and smelled funny.
Shouldn't they have checked that first? 
And doesn't diff fluid always smell funny? I am at my wits end with these mechanics. They have told me that they are not sure what it is and that they are going to try a few different things. Sounds like more guess work to me. Does anyone have any "guesses" of what else would be causing a steady knocking sound coming from the front end while in 4 wheel drive? It is really pronounced when you let off the accelerator and let the slow itself down. Thank you for letting me vent. Have a wonderful Halloween and stay safe.
Brent