Sounds like what mine is doing, except it was perfectly fine, no slipping or anything and all of a sudden heard a grinding noise and bam, down hill from there. Mine will catch gears fine, until it gets warmed up, then it won't grab anything, but it will still idle just fine. But, I'm taking money out this week and its going in the shop next week to have it rebuilt or whatever it needs to be done. I'll let you know what mine is, I'll post it on my build thread.
Trail TESTED, not Trail RATED
'97 ZJ 4.0|3.5 RC F>R|31" Hankook Dynapro M/t|1.5" wheel spacers
Build thread: http://www.jeepforum.com/forum/f197/my-jeep-build-d-1239689/