Well after months of my S60 sitting I finally got the time to tear into it and see what was the issue with the AWD. After pulling the angle gear box/transfer case I found that the coupler between the transmission and AGB was stripped in the AGB side. I had already bought the coupler kit from the dealer, so I did not have to chase any parts. I did have a good set of micrometers that I could check the input splines on the AGB and could not find much wear, but the coupler was very rusty and compared to the new coupler was totally warn on the AGB side.
The time to replace the coupler was just over two hours and really not that bad of a job. I did this on a hoist so that made it easy to do all the under car work. No need to pull the rear drive shaft, the AGB will move out of the way giving plenty of room to remove the coupler. Removing the two bolts on the upper knuckle too the strut gave me enough room to get the axle shaft out of the car and again giving me the room to get the axle out of the way.
I really want to thank all the response to this post with the info from all of you, it helped me doing this job
Gene