transfer case failure/jake brake sound

My 95 4x4 occasionally started making some loud grindind sounds, like a grinding Jake brake (1-2 seconds long, and got londer every time). This happened ~ every 3 month.
recently when going highway speed, it started to quit pulling (would rev without moving the truck), and it slowed down, once going slower it started pulling again. It did this 2-3 other times. I suspect the tranny fluid a while back and added a bit till it was full, but it made no differance.Last Sunday it did this, but never started pulling again. It sounded like the tranny was doing something when put into drive, and I got a brief grinding sound when going back to Park, like something was spinning.
It sat (in the Sam's parking lot) for a couple of days and did not improve any, so I had it towed to a tranny shop. They advised me thet the tranny needs an over haul and the tranfer case needs an output shaft bushing and seal. After the repair the truck still did not work (same symptoms). The man now is telling me the transfer case is out too, but i believe it was the problem all allong and missed this during diagnosis (scary). He wants another 1200 on top od the 1800 I am to pay him for the tranny.

Do you thing the noiuse and the transfer case failure are related?
Do you think the tranny and the transfer case failed at the same time ase the repair shop wnats me to believe?

First let me say that I am no expert, I am only replying because I am having the exact same problem with my 97 explorer. I took it to a very reputable trans place. The believed it was either the trans or the transfer case, and we decided to check the trans first. I had several burnt clutches and the converter was shot, of course I had to have it rebuilt. They test drove it and it solved my grinding and shifting problem however, there is a "bad" sound coming out of my transfer case now. They believe it was there before but with all the other "loud" sounds happening it was more difficult to hear. It is being taken apart today and they will tell me how much of the transfer case needs to be replaced. Good Luck.

after further negotiation the the manager of the buisness group, thy saw my pint and agreed to replace the tranfer case. My tranny and transfes case cost 2K.
Transfer Case Expesss has these available for 695.00.