That's right, it is shift-on-the-fly. But you must be traveling in a straight line and not over 80kmph (50 mph).  I have been doing more tests now since it started to snow here, and I found out that it does not grind even though you push it very hard. If you have been driving in 2wd for some time it can be hard to switch it to 4wd the first time, but it works. Here is what the service manual says about possible causes for hard shifting in the transfer case:
1. Weakened front drive shift shaft spring
2. Distorted or mispositioned front drive shift
shaft circlip and washer
3. Worn synchronizer ring
4. Worn chamfered tooth on sleeve or gear
5. Distorted shift shaft

Since I still can shift it to 4wd and there are no abnormal noises from the transfer case, I am not going do anything about it for the moment.

This tells me lots more, the front
has a syncronizer, this little thing
is a brass cone shaped thing with
teeth that match the gear, it speeds
up the T-case and shafts to allow shift
on the fly, kind of like trying to put your
trans into 1st going freeway speed, it's
going to be hard and take some time
to get it all spinning

Wild