TJ, based on what I've experienced with it recently, I'd say you hit the nail on the head. The odor is not present when in 2wd, begins shortly after being put into 4wd, and disappears again after shifting back into 2wd. That's why I'm thinking wither T-case or front diff.

I guess I'm just curious if anyone has experienced this, and if so, what did it end up being?