I think you will find the " sqare hole " is just a gap between the transfer and the gearbox. I also think that the leak would be coming from the input seal of the transfer... its very common to run the transfer at very low oil level, and then when its topped up, a poor /dry input seal will leak oil. Witness the rusty oil stains. That would be the transfer jackshaft ( from the gearbox) spline chattering in the female input spline in the transfer case. From all the chattering, there will be heavy wear on the spline.... steel powder then rust away etc. I would have a very good look at spline wear on the shaft.
I had a customer VR4 come in this week ( and not an aggressive driver) complaining of severe clutch slip. It was actually stripped splines on the shaft and transfer ... It had evidence of heavy rust powder that had been there for a long time. It is a bit of a long process that then accelrates rapidly and then , no drive !
Mike
