Friend of mine has an 01 that once you put it in four wheel drive only the rear spins until about half throttle then the front engages. But when you get off the throttle it disengages again. You must rev it up again to get it to engage. Sometimes it grinds during the transition. I think something in the transfer case is at fault.

Any ideas?

I don't think its a CAD problem as any grinding that occurs comes from the T-case not the front axle.

 

Since the front axle is locked via a vacuum switch, start there.
It sounds like has a vacuum lead somewhere. Start at the vacuum pump and work your way to the firewall then down to the transfer case then the front axle. Do yourself (him) a favor and go ahead and but some 1/4" rubber 90's as the one on the vacuum pump is probably dry rotted a little. Also, check the hose on either side of the filter at the firewall. it is between the hose coming from the vac pump and the "T" the goes to the rest of the system.

 

I know the transfer case just pushes in on the vacuum switch to allow vacuum to go to the front axle CAD. The vacuum itself doesn't do anything for the transfer case, just the CAD. All the grinding came from the case, not the front axle. I don't think it is the issue but we can check.

 

Sounds like a vacuum leak, but that's weird that it grinds the from t-case.

If nothing else, check the vacuum line that goes down under the battery to the speed control servo... that often breaks from the corrosive environment in which it finds itself.