Yes, shifts ok and drives ok. I have it in 2wd now. The noise started after I drove for a while in full time 4wd and parked it overnight. The next time I turned the key it made the noise. Doesn't change no matter what the transfer case is shifted into. I can take a video and record the noise if you are interested.

The reason I drove in 4wd is because the car had been sitting for a while before I bought it and someone told me that it should be driven in 4wd once in a while to keep everything lubricated, is that true?