So, I finally got around to do some work on it. Seems like the drying out did the trick on the speedo. It shows the correct gear and the awd goes on and off as it should. Didn't have the chance to check properly if it engaged the front wheels, but I went slowly through the mud without problems, so I think it did.
The whole shifting process has been a bit tricky/ loose shifter, so I checked it out earlier, replaced the 31teeth sector gear(cut to 11t) as it was missing a tooth, and also a new compression spring for the detent pawl. The new spring was 3 times longer than the one I found inside the cover... So now it stays firmly in gear, no more feeling around to find the correct one.
Anyway, as the speedo seemed fine'ish I didn't do any further troubleshooting on it. Was leaving the next day for work as well. It did however, show up with an EE when turning the ign on, not sure if that's an error message or normal. One of the digits for the rpm are also intermittent, so I'm thinking there might be more water in it, or simply broken. Will look into it further when back from work.

Glad the speedo is drying out and retuning some functions.Hopefully a little more drying will solve the display.Too many functions have to go through them,but that's the way 2000 and up models are.Hope you greased up the selector gear quadrant as that's the way they were from the factory. Found a bunch like this with chipped teeth,rusted gears,broken detent springs.The plastic gear selector covers can warp a little over the years allowing water in same as the thin gasket. A good water resistant gasket sealer can help.

I applied some grease, bit more than a thin coat, onto the new sector gear, and also in the gap where thatone is centered. Also added grease to the other gears where I could. Replaced the o-ring(6) through the cover on the selector axel. Didn't fill the whole gearcase with grease, should I do that? Think the manual said thin coat, bt uI'll pop it open again if needed. Did not disassemble the other axle with the detent star, just greased it up as best I could.
First time I had it open, it was quite some mud and water, maybe some oil. The Park lock pin was stuck, a bit corroded. At least I got that one working again, as it cost about $230 around here. Tried to order a new gasket, but apparently those are obsolete, just using liquid gasket sealant now.

Liquid gasket is good stuff. Here's how one guy greased his selector gears. Just about what they looked like from the factory.Stole pics from the other forum.. :) Hard to Shift 700 Sportsman 2004 - Polaris ATV Forum

Well, I didn't put that much grease into it, but I'll do that when I get back. The shifter is pretty hard at the moment, so I guess it could damage the gears. At least it stays firmly in gear now. Also, my gears wasn't cose to as rusty as that one on the other thread, more greasy/oily in there. Just concerned that the trans is leaking into the sector gearbox. That's another thing I'll have to check out. Will see the state/ quantity of transmission fluid. Gotta replace the rest of the oils as well, done the engine so far.