Frisbee==I'm confused as hell...:h
Your synopsis as to how the EB is supposed to work is correct. What's confusing is what you are experiencing.
1. You said, Exhaust brake tests good and is lubed. How did you test it?
2. You said, Tranny downshifts but exhaust brake won't engage. but later you said it did not. Does is downshift or does the tranny pad light simply change to 4...??
The EB is a pretty simple device. That said, it sounds like maybe someone changed the downshift from 2 to 4. Both my Monaco's shifted to 2 but could be reprogrammed to 4. Don't know if that's what happened to yours or not. Do you have a foot pedal as well ??
Finally, my experience is that the original EB was pretty much junk compared to the PXRB. I switched mine out on the Dynasty and noticed a significant, and I mean a VERY significant change from the original..took me about 45 minutes in a campground with simple hand tools to change it out......good luck...Dennis