And then the transfer case grenaded ... Ugh

So frustrating.  Every time I get something done, I feel like I get a new problem.  I love this Jeep, but it's starting to piss me off.  As it's at the smog shop, the transfer case starts to crunch.  The smog guy had me take him for a ride around the parking lot once the noise kicked in.  It sounded like gravel in a coffee can.  I don't believe he did anything to kill it.  From what I understand, the only way to kill one is to have the locking hubs up front disengaged, and then you shift into four wheel drive.  I don't know why he would have done either of those given that his smog test equipment is designed only to work on one set of drive wheels (front or rear).  I limped it home and started thinking about my options are.  Is it dead?  If so, do I rebuild it, do I replace it, or do I upgrade it?