I've tried both, when driving I put my hand down on the lever directly on the transfer case and actually tried pulling it out when driving and its solid locked. then randomly it will slip out. It also is now grinding when trying to engage in neutral,,,

 

Yeah, that doesn't sound good at all. Since only the front output section of the t-case was worked on, it seems likely that that is the culprit. I know that it can be tricky getting everything set up correctly with the pre-loads and alignments right; I did mine with the case out of the truck, and I can't imagine how it would be possible to get it all right with the thing still in place. You might be looking at a full transfer case replacement, or at least another nose job.

 

Since I have a LS Swap and have put some cash in this thing, im leaning to getting a reman transfer box from Ashcroft with the 1.410 gearing and difflock and not have to worry about this older transfer case failing sooner or later... Hind sight should of done this anyway! ha!