Grinding noise from NP231 transfer case

Hi all,

Driving home from work the other day I heard a loud bang, and then a grinding noise. It sounds like something is rubbing on the drive shaft but the noise goes away when coasting or when I'm in 4L.

At first we thought it could be the pinion bearings but they all seem fine. The Hanes book says that this indicates a transfer case problem. We pulled the transfer case today and opened it up and nothing seems out of the ordinary. No metal filings, no broken parts, bearings seem fine.

Should I replace the transfer case or is this something else?

The Jeep is a 6 cyl 4.2L 89 YJ, all stock parts.

Cheers.