[Quote] OK, lets back up here a tad. Do you in fact have a CAD front axle? Not all 89's had it. A CAD axle would have the vac disconnect unit as in this thread.[Quote]

I think you might be right about it not being the CAD, but i am not sure. Here are some pics of the front axle.

It also looks like there is some oil coming out of the diff. could that be part of my problem?

Thats a non CAD axle. The leak is a bad pinion seal.. just keep checking the fluid level and make sure it's topped off till you can replace the seal.

Sounds like the transfer wasnt fully engaged in gear and it popped out, it can happen. Might also need a linkage adjustment. I'll dig out the info for that procedure if someone doesnt beat me to it.