It just grinds as it engages, or it grinds the whole time you're run it, like when you move?
These cases have a bad habit of "spinning" the pump housing and losing lubrication, but that would make the entire case have a problem.
If it only grinds when you do shift-on-the-fly while in motion, that would imply a failure of the solenoid activated clutch that gets the front driveshaft spinning before the main engagement of the chain happens. If that doesn't function, you'll get a noise when you shift, but it will stop once engaged.
If that's the symptom, don't engage it on the fly until you have it looked at. There's a brown wire that goes into the housing on the ones I've seen that is the wire for the solenoid clutch. It goes in it's own hole in the diff housing, just the one wire.