Help -- Transfer Case grinding, can't drive truck

[Coalsmoke]

If anyone thinks they may know what is wrong, please add your 2 cents. It started with myself and another rebuilding my transfer case over the weekend. After re-installation, I test drove it and within 5 seconds of driving heard a deep twang / knock sound. Then, shortly after, I would get a grinding sound from the transfer case, but only when accelerating hard and in 2wd, (no noise apparent when in 4wd). I pulled it back into the shop suspecting the somewhat common tailshaft c-clip to be broken and expected to fix it with the improved version of that clip, only to find that the original c-clip is still in position Now, I was pretty sure that everything went back together ok (unless we put something out of placed), and there is no unusual slack in the system when I turn the tail-shaft by hand, but obviously something is not right. I am afraid of pulling out the transfer case (big job), opening it all up and seeing nothing out of place, just as was when we put it together.

I am wondering if a c-clip came loose inside, but we made sure that they were snapped down good, and there is no crunching sound as if it were caught in gears. Thinking about it, those clips were really tightly snapped in, and I doubt that they could slide off, but I am completely bafled???

Ideas? help?

thanks in advance,
Stephan