94 SR5 Mountaineer

I have a 94 Pickup manual. I was going up a hill today going about 55 and it started to bog down, so I opened it up just to see if it would pull through. I heard a thump and got out to check and the transfer case was smoking where it meets the driveshaft. It runs through all gears no problem but when I let off the throttle I hear grinding.
Can anyone diagnose? This is my daily driver and how I get back and forth to class. Much appreciated

TNRabbit

Does the xfer case have fluid in it?

94 SR5 Mountaineer

It's the rear end. I don't know the extent of the damage but will find out tomorrow when I pay the local shop for taking a look at it.
Been wanting to try a Truetrac, is this a worthy investment since i'm at a convenient time for it? And if I order default V6/turbo 8" Truetrac, does it have 4.56 gears? Never had experience with lockers but from what I have read I'd like this one to be my first.