Did you rebuild the rear-end or just open it up to look and see what was going on? Try jacking up the rear of the jeep so that both tires are off the ground, put the x-case in neutral and have a buddy hold on to the tire on one side while you spin the other and vice versa. Do you hear a noise, feel a roughness while turning the wheel, or do the tires not spin easily or one side won't turn much without the other turning too? (Assumes you do not have a locker or limited slip) Any of the above points to the rear-end. I've had two D35s go bad on me over the years and that is without the 35s. The rubber plug is bad at best to keep the fluid in the housing and maybe the guy who had the jeep before you screwed up. The only other thing that comes to mind, is the grinding is really more of a howling? If so maybe the gears aren't set up right. I'm not an expert on axels but you should be able to come up with the culprit by the process of elimination.