Wana,
There is a switch mounted to the gearbox at the base of the gear shift lever with the sole purpose of allowing the OD to ONLY be engaged in 3rd and 4th. When you shift into 2nd, 1st or reverse this switch turns off the energy to the OD. A quick check to make sure this switch is working is to turn on the ignition key (don't start the motor as it will make too much noise), flip on the OD switch, stab the gas pedal once, and move the gear shift back and forth between the first/second gear side and the third/fourth gear side (you don't have to go into gear, just back in forth left to right in the neutral area of the gate). You should hear the OD click on/off each time you go back and forth. If you don't hear the clicking then you should look into getting this fixed! If you make the mistake of driving in reverse with the OD engaged you will quickly ruin the OD.
There is also a throttle switch for the OD, located on the engine side of the firewall which keeps the OD from disengaging if the pedal is not depressed more than 1/3 (the amount of pedal travel can be adjusted). This is to avoid applying too much braking pressure on the OD.
You won't hurt anything if you keep the dash switch in OD but when you shift into third you will be going from 2nd gear straight into 3rd OD which is a big jump (about like going from 2nd into 4th non-OD). It's a better idea to switch back to non-OD anytime you are in 1st, 2nd, reverse or stopped.
Cheers,
John