On an NP205/TH350 set up (didn't say what you have) the adapter has 2 seals and an Oring on the input shaft of the transfer case. All 3 need to be in good shape or the transmission can leak into the transfer case. Here is a pic of the Oring on the input shaft. The coupler slides over it sealing the inside of the coupler. The two lip seals that go in the adapter seal the outside of the coupler.
You can see the lip seals in the adapter on the right
