The engaged but not actively engaged issue could very well be related to the two pistons that sit inside the OD and drive it. I'd actually be surprised if the OD is "shot"... never heard of one dying. A gearbox maybe, but not the OD.

I recently had my transmission replaced with a new/used job that my mechanic had leftover from a manual->auto conversion he did for a client 5 years earlier. I should note that the tranny worked perfectly after 5 years idle OUTSIDE... scary how indestructible those things are.

Anyway, the early (pre-1988?) ODs had pistons with small grooves around them in which a rubber O ring was placed to seal it. The grooves and O rings used in the original were too small, allowing fluid to seep past and inhibiting OD operation. The fix is to pull the OD and replace the pistons and O rings with the upgrades. FYI, the grooves in the new pistons are twice as wide as the old ones, insuring a good fit. Additionally, I should note that the used OD I got on the tranny had warped pistons (not sure why, but there was about a millimeter difference in the dimensions on either side of teh groove).

On a sidenote, my mechanic was telling me once how when they first got the 700s back in the 80s they'd have to drive them pre-sell to wear the OD back in, going upo and down the highway engaging and disengaging the OD to get it working right again.

Good luck,
Rick, 1985 745t