My take on it is that something has completely bound up tight and there are parts in the xfer case most likely that are grinding against the stuck piece(a bad diff might also explain it).
Imagine the old bicycle card in the spokes trick - now with big metal gears. Def wouldn't drive it another block without pulling it apart - lest it REALLY seizes up and takes out half of your driveline.(or you if at speed).
*edit* of course, ask MC - they likely know exactly what the sound is.
