Need help ID'ing suspected transfer case problem

[Renegade_Medic]

I have developed an issue today in my 99 limited with multimode transfer case.
I get a very loud grinding sound coming from my transfer case, I suspect. I was driving and put the truck into AWD, just to exercise the system. It took a while to snap out of it and just flashed the lights at me, like it has been doing for the past year or so, then it usually goes back into 2H when I stop. When I stopped today, I got a loud clunk and then grinding. I was at a busy intersection, so put it in N, then back to D, loud grinding and not going anywhere. I pulled the shifter playback to 4H just to clear the intersection, D worked fine with no grinding or fuss. Cleared the intersection and put it back to 2H and it's just grinding in all gears. AWD and 4H/4L all work fine, but 2H I get nothing. Did I strip the teeth off my output shaft? Stretched the belt? Admittedly, I haven't checked the fluid level yet, but about a month ago I replaced the front output shaft seal and refilled it with fresh oil, and it doesn't leak, so I can't see it not being full. Anyone have any ideas?
Here is a video:
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Thanks!

 

[Bad Luck]

That's an awful noise! It sounds like gears aren't meshing correctly or are too close together when they shouldn't be touching. I'm not really familiar with the internals of the VF3AM transfer case, but since 4wd is working I would assume the chain is fine. I'd try draining the transfer case fluid and seeing what that looks like. If it were mine I would consider swapping in a normal j-shift transfer case and being done with it.