If it grinds when you try to shift the transmission into a gear without pushing in the clutch, that would eliminate the clutch and most of the tranny as being the source of your trouble. It sounds to me like the transfer case is stuck between hi and lo, sort of in neutral even though there isn't a spot for it. Could be the hi-lo shifter is screwed up which might not be too hard to fix, but it could be a gear or a shaft which would take a lot more work. I'm leaning towards it being just a shifter problem or shift fork bent/broke. Normally the transfer case in these trucks is pretty bullet proof, even a built up stock motor is going to have a hard time breaking shafts/gears.
Try shifting the tcase around and see what you get. It would be in going between hi and lo, so if that feels pretty normal I'd be thinking the issue is more serious and you'll want to start looking for a replacement tranny.
If you haven't, make sure you roll the truck around a bit in gear, and in hi and lo on the tcase. Making the output shaft(s) turn a bit might get it to catch and get it moving again.
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95 Isuzu Trooper Daily Driver
86 Isuzu Trooper reliable backup
77 LUV 2wd stock beltway blaster (resting)
79 4x4 LUV project: 2.6L, 5spd, 31s (eventually)
MEPR: Man, my 4x4 makes all other LUVs look good
