From what I remember when I had to replace the transfer case a year after I bought it (it was a 1996 that I bought in 2006 and the previous owner abused it), it was more or less a "traditional" Jeep 4WD setup but depended on the transfer case to keep the front and rear axles independent until slippage was detected. I think it was pretty much fully mechanical, except for the auto locking front hubs. I believe Jeep's marketing term for it was Select Trac or something like that.

I think the issue was with the auto locking hubs; when it malfunctioned it would lock the front hubs together and in turn the transfer case would lock the front and rear diffs together, causing the wheel hop. This defect probably contributed to the death of the original transfer case, now that I think about it.