The problem is that no oil can get to the gearbox output to transfer case input splines and they fret and wear.  This affects all LT230 transfer cases prior to mid 1994.

The symptoms are clunks, i.e. backlash, in the transmission especially at low speed in low gears.  I don't believe that the wear will hurt anything until the splines break.  This, of course, will leave you stranded and the loose spline bits could damage the rest of the transfer case.

The fix was to fit a splash ring (bulletin H415) to the shaft which improved lubrication of the splines. Transfer cases with this modification should have a prominent paint mark on their rear cover plate.  This fix limits further wear.  The more expensive fix is to replace with the newer longer splines with a cross drilled transfer case input gear.

This covers LT230 boxes prior to 28D 460996 F Discovery, and 22D 461124 F Defender and all Range Rovers with the LT230.  Following this the LT230 transfer boxes have had longer splines and cross-drilled oil feed holes thus solving the problem.

The matter is discussed in Land Rover bulletin "37/20/96".