The overdrive unit in my 1987 works well when on. Kicks down when it should - no issues what so ever.
However, it will randomly turn on and off while cruising down the road (not under load) causing the the car to shift in and out of OD at times.
It acts like I have pressed the OD button on my shifter by mistake (that is not the case though). Has anyone had this issue?
It seems to me maybe the switch might be faulty?

 

Fluid level may be low.

 

Ditto on the low fluid. Could also be dirty and clogging the filter. There is a pressure switch that prevents OD if it's low.

 

Check the fluid...and speaking of fluid...when was the last time it was changed and a new filter installed?
https://www.summitracing.com/parts/wix-58926

 

In an 87-88 4+3 car the OD lamp (in the dash) (Mode Word 2 Bit 0) indicates that the ecm is trying to activate the OD unlike the earlier cars where the OD lamp (in the DIC) is driven from the relay. An issue downstream of the ecm involving the relay, fluid/pressure switch, solenoid or related wiring may prevent OD activation as intended by the ecm, or result in intermittent activation while the OD lamp is on/active.

Is the OD lamp behavior consistent with the OD activation?

Does the OD lamp remain on after the OD (randomly) downshifts (on its own) to direct drive while cruising in the upper gears? Does it stay on until the car is stopped (or nearly stopped)?
If so, this would point to a relay, fluid/pressure switch, solenoid or wiring issue. Low fluid is a likely candidate. Check the wiring insulation at the relay.

Bitmask detail for Mode Word 2 and DNEE Mode Word:

Mode Word 2
;
; Bit 0 = OVERDRIVE ON (Lamp) (maps directly to DNEE Mode Word Bit 7 = OVERDRIVE ACTIVE)
; 1 = ERR 14 or 15 THIS STARTUP
; 2 = REF PULSES OCCURRED (6.25 MSEC CHECK)
; 3 = 1= ALDL MODE, 8192 LOCKED IN, & MODE 4
;
; 4 = DIAGNOSTIC SWITCH IN DIAGNOSTIC POSITION
; 5 = DIAGNOSTIC SWITCH IN ALDL POSITION
; 6 = HIGH BAT. VOLT. , DISABLE MCU SOLENOID DISCRTS
; 7 = SHIFT LIGHT (1= ON, 0= OFF)


DNEE Mode Word
;
; Bit 0 = OVERDRIVE ON
; 1 = 1st GEAR DIRECT
; 2 = 1st GEAR LOOK-AHEAD OK
; 3 = 4th GEAR
;
; 4 = 1st GEAR OVERDRIVE
; 5 = DOWNSHIFT/OFF REQUEST
; 6 = UPSHIFT/ON REQUEST
; 7 = OVERDRIVE ACTIVE

 

Thank you everyone for this great info! I will attempt to get to it this weekend and replace the fluid and filter.

 

You may want to drop the valve body and thoroughly clean it while you have the pan off. Mine was doing the same thing and this cured it.