Chewed up transfer case

[bs3]

Greetings, i have a 1974 FJ40 with a transfer case problem.  It was making a ugly noise so i checked the fluids, found the transfer case oil to be the shiniest so I took it apart last night and found the damage shown in the pictures above.  It has a four speed transmission, SBC 350 engine and a transfer case from a unknown year, the guy i bought it from thinks its from a 1975-1978 and from what i can tell i think he is correct.  I'm having trouble finding why the transfer input gear was "hole sawing" the case just forward of the gear,  the transmission has the input gear stopper is in place, the only thing i can't tell is when i pulled the transfer case back from the transmission what position the input gear was in (whether it was put in backwards with the seal surface facing aft allowing the gear to contact the case) but that doesn't seem likely.  The only other damage i found was the cluster gear shaft and bearings were trashed.   The other possibility is that at one point somebody assembled the transfer case wrong, the above damage occurred, they pulled the transfer case back off and corrected the problem but didn't replace the housing, this might be the most likely scenario to me as the input gear had no contact marks at all.

Anyways i was wondering if anybody had seen anything like this before, any help would be appreciated. 

[LCOwner]

Chuck that case in the recycle bin and buy an Orion

[bs3]

I hear that, after thinking about it today i put a order in for one at AA.

[lc tpi]

 im pretty shure that the four speed should have a spacer on the output shaft sandwitched between the bearing and the input gear. if this is missing this could be your problem.