97 k3500 transfer case issues

97 K3500/ NV4500/ BW4401 T-case, 129,500 original miles. SWMBO(the boss) was driving the truck so I can't verify exactly what happened, but:
She pulled out from her office and went to shift gears and the "power" went away, with a light(not loud) bang/bump. She rolled over to the side of the highway, and called me to come and rescue her. When I got there, my first thought was clutch(again, dammit). Second thought was she kicked it out of transfer engagement. Started truck, checked transfer lever console, which showed 2hi, pushed in clutch and engaged 2nd gear, light grinding/gear grumble noise. Shifted t-case to 4hi, same noise. T-case neutral, no grumble, normal tranny whirr. T-case low, same grind. Back to 2hi. Shifted trans into higher gears, speed of grinding sound varies with gear engaged.
At this point, Google has failed me, lots on loss of 4lo or both 4lo and hi, but nothing on complete drive "failure".
Numbers from t-case tag: D31797 4401-019(line 1), 12005 15733774(line 2) Tag is blue, appears original, numbers are clean and legible. Called my BIL, who purchased the truck new/ I am 2nd owner, and this is the original t-case with no previous issues for either of us.
I have the complete set of GM service manuals including powertrain supplements(thx to BIL), that being said:

1) Found 1 really poor parts/powerflow diagram which shows an input shaft and a rwd output shaft which I presume also caries the primary sprocket and reduction set for 4wd. Can/could/do these cases fail at this coupling point?
2) If there is a shift fork/shaft failure, could there be a false neutral point between 2hi and 4hi?
3) The service manual makes no mention of needing to remove the torsion bar crossmember prior to removing the transfer case. However close examination of the available area indicates to me that this may be required, at least with my powertrain.
4) Sources of parts? Nearest wrecking yard to me is 70 miles and they sell complete case only. My current financial situation dictates least cash outflow, my time is currently available.
Any knowledge/advice greatly appreciated. Thanks

On my 94 I could lift and turn the TF case to clear everything to get it out. Usually used my belly and my arms to lift it in and out and a floor jack for the trans. On mine the fifth gear came lose. There is an updated gear and set screw assembly to prevent this. Try searching TDP for fifth gear problems.

Parts I have used Drivetrain.com 800 216-1632 and they have Saturday phone support if not ordering. They are great for information and will help you troubleshoot your problem. IIRC it was $54 for the fifth gear fix for mine but that was a few years ago.

If that is your problem you can get to it by just removing the TF case and back cover on the trans. Wont have to drop trans.

Give them a call it cant hurt or cost for information.