So that's what that noise was..... Opinions?

cause a blown up R&P is so much better

In my opinion, yes. I have countless hours of bracket fab into my housing for the coilovers and otk steering etc. The housing is already messed up from the last break I had. If the housing gets trashed, swapping in a new housing would be a ton of work since I'd have to strip it and rebuild all the brackets and truss. Not to mention, would you rather have 2wd on a tough trail, or separate the knuckle from the inner c completely and try to get out of that "difficult" trail with only 3 wheels attached and the housing dragging through the mud and rocks? That's just the way I look at it. Also, even cost wise the ring and pinion is better than an expensive locker setup, like an ARB.
 
I'd rather separate a knuckle or blow a ujoint than anything else.

Why? The devil I know vs the devil I don't. I can (and have) slapped new shafts in, forced balljoints back together, and/or replaced balljoints on the trail and continued wheeling. It meant limping home after getting out of the woods, but I still had functional 4x4 and didn't need any winching.

Also, much less chance of permanent housing damage than a blown R&P, carrier, or shaft right at the splines - I've seen pics from other NAXJA members who had a chunk of ring gear tooth get stuck in the wrong spot and punch a hole through the side of the pumpkin. Not good, diff went from rebuildable to junk the second they discovered that. I think it was shortxjdoug who posted it.
 
Is this ARB rebuildable? How hard is rebuilding an ARB? Anyone ever do it?

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Damn... with the carrier bearing looking like that, check to see if the carrier bearing race swelled enough to damage the housing bearing cap. I'd almost bet on the housing being damaged too :(

You need a new ARB carrier half and probably some other stuff, start pulling it apart, figure out which parts are damaged, and get on the horn with ARB. IIRC they actually do sell repair parts for their lockers.
 
Yikes, that looks pretty rough. My bearing caps weren't in very good shape after my damage, and I'd bet yours may be out of spec after that! Inspect them very carefully, and use a new outer race to mock them up and make sure the caps aren't stretched and out of whack. On a side note, I'd replace a ring and pinion any day over that. This could result in a new housing, new ARB, new shafts and possibly a ring and pinion any way if it's pitted...
 
So this is the inside of the passenger side axle housing. It looks like the bearing seat is clean. Some damage around the seal, but I can RTV, can't I? The damage inside the tube is mostly superficial and inconsequential, right? Anyone see anything I don't?

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The inside of the tube should be ok. The main concern is the bearing seat and the bearing cap. Inspect them carefully to make sure they aren't deformed or stretched from the bearing coming apart. The rtv shouldn't be an issue, it just seals the tube to the housing and what you see it excess that smooshed out. You'll obviously need a new inner seal for the shaft though.
 
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