So, when my 98 Disco shifts down it makes the worst clunking sound. All four U-joints have been replaced and lubed... I drive with my 4 low selector all the way down and all the way to the right. But ive noticed it can sit all the way down and in the middle... But if i do that my light comes on. but it doesnt when i put it in 4wd Low in which i just go from the bottom right to the top right... Am i doing something wrong? Transfer case fried? Letting off the accelerator at all causes this sound... Its a CLUNK clunk! so its either my Transfer case... Or a possible tranny problem... But i got under it and my friend shifted and i could see there is play from the front axle to the transfer case... Like its lose? i can feel it shifting down from under my feet... So im not sure... Knowing my luck it needs a new Tcase.

 

Sounds like you might have a broken mount somewhere.

 

Try prying the mounts with a big prybar. If one of them is shot you will see it immediately.

If your mounts are good, change the oil and check for any chunks of metal in it. And while the t-case is empty, remove the panel under it. That way you will have access to the inside and you will see how it looks like. My t-case was fried, and big chunks were missing on the gears. It had exactly the same symptoms as yours.

 

If you shift the t-case lever towards you yoiu will be in hi-locked and the light on the dash will come on, then move the lever forwad and you will be in lo-locked, lights stays on when you are locked.

Start by changing the fluid in both differentials and the transfer case, use a 85w-140 gwar lube.
There is a write up on how to do it, you will need 8 qt's of gear lube, I buy mine at TSC and it costs about $35 total.
You will also want a hand pump, $10.
Just make sure you remove the fill plug before youi drain anything, you dont want to drain the transfer case just to find out you cant refill it because the plug is rusted.

 

Rotella gear lube is also cheap at walmart and a very good gear lube