Ok, I'm adjusting the linkage on my transfer case.
I've got a 1996 Dakota. The front driveshaft is currently NOT installed.

With the transfer case linkage bar not installed, and the case manually set to 2WD ("sector shaft" all the way clockwise), the front driveshaft yoke rotates with the rear driveshaft (under engine power, as well as manually rotating).

With the linkage bar installed (able to shift from the cabin), it does the same thing.
I'm pretty sure the adjustment is good. The case will kill power to the driveshafts in neutral, and 4HI appears to work.

Manually rotating it (transfer case neutral):
When transfer case is in neutral, the rear driveshaft spins the front yoke when spinning to go in "drive" but not "reverse". Occasionally, it will hit a sort of dead spot (usually when you stop rotating the rear driveshaft, you can hold the front yoke, and it will take like half a rotation of the rear to start spinning the front.
When manually rotating the front yoke, the rear will engage only when rotating in "reverse."

The transfer case was ordered as a rebuilt unit, and has less than 1,500 miles on it.

Basically, what's up with this, and is it normal? If not, what should I be looking at?

 

Does it actually engage the front yoke in 2wd? In 2wd the yoke should turn freely by hand (if there's no driveshaft on it). There is still friction in 2wd, the front output will still turn when power is put through the t-case. Transmissions (manual and auto) will also turn the output shaft in nuetral if there is nothing stopping them. If it's actually solidly engaging, I suspect the snap ring on the output shaft has popped off. This is common with the NP231, mine did it. When it pops off the mainshaft can move back and forth about a 1/2" and engage and disengage 4wd randomly.

 

Okay so in 2wd you can manually spin it by hand right? But it will move with the rear driveshaft also in 2wd right?

How about if you hold down the front driveshaft and spin the rear driveshaft by hand. Does the front hold steady, or will it force it to turn? If the front holds while the rear spins maybe its just catching the momentum of the rear shaft, I would guess that is normal.
If it forces the front to turn, my guess is something is making it bind on the insides.

My other guess is maybe the transfercase isn't in 2wd. The dent and ball may be not allowing it to go into 2wd although it is all the way, or something like that.

 

Ok, the adjustment might have been a hair off?
After reading what Hahns said, I went out and took another look, messed with the linkage so *very* slightly.

(Rear of truck jacked off the ground, front driveshaft not installed)
Now:
Transmission: Drive
Transfer Case: 2WD
Front and rear driveshafts spin.

Transmission: Neutral
Transfer Case: 2WD
Front drive shaft free spins by hand (rear driveshaft doesn't engage front; front does not engage rear)

Transmission: Drive
Transfer Case: 4HI
Front and rear driveshafts spin. The difference between Trans : Drive, Case : 2WD is that this now has a "bearing spinning" sound coming from the main-shaft area of the transfer case (it actually sounds like something is engaging/spinning with the front yoke)

Transfer Case in neutral still disengages front/rear, and 4LO results in both rotating slower (as should happen).

This, and the darn adjustment on the parking brake (bottoming out the nut on the adjustment rod doesn't even begin to apply the parking brake; service manual doesn't make any sense).

 

Sounds normal to me. As I said, friction will cause the front output to spin. You should be able to stop if from spinning by hand *I'm not responsible for any injuries that may result from trying this*. Or put the front driveshaft back in with the rear end still jacked up, if it doesn't pull itself forward with the front wheels, there's nothing to worry about.

 

Hahns, are you saying that he puts it in drive to see if the front wheels pull the truck off the jack stands? LOL