It seems when I push the auto 4wd button, I can hear the front drivetrain engaged but this is on pavement where I no doubt have traction. Can someone explain to me how this option works?

 

I have actualy talked to New Venture (who makes the t-case) about the AutoTrac NP246 Transfer Case to learn how it works. And I have taken mine apart and seen the parts first hand.

AUTO 4WD: The front axle engages and the transfercase engages 4wd. BUT, there is a Clutch Pack that also comes to life at this point and it controls how much power goes to the front axle. So under normal driving it will be dis-engaged and if the rear axle starts to slip it will start sending power to the front axle to compensate. It can mechanicly send anywhere from 10%-50% of the power to the front axle.

So, it sounds like you are in 4wd because the front axle is engaged and the drive shaft is spinning but, no power is going to it... yet... And yes, you will see a MPG drop in Auto 4wd mode...

4WD Hi - Lo: Front Axle is engaged, transfer case is engaged and power is sent 50-50 to the front and rear. NEVER use this mode on the street!!!

Here is the comapny that makes the t-case, the case you have has the Active On Demand 4wd.
http://www.newventuregear.com/tcases.html

 

How about at the track. I use my 4hi on the street, have you seen any failures from this? It doesn't feel good to lock up in a tight turn, but how much torque does it take before the tires break loose in a turn, and is that enough to actually break any parts?

 

A lot of us run the auto-track transfer case in 4wd at the track and i have yet to read of any issues. The manual for my truck says that auto and 4 hi can be selected while driving 'at any speed'.
On the other hand, the guy who did my gear swap and knows his job well told me to never run 4wd on the street.

 

does the auto 4wd work well in snow? ie how quickly does it engage?

 

I spent a few days at Lake Tahoe last year, snowed as soon as I got there and the roads were 2" thick with ice. The auto track worked surprisingly well just driving to and from the slopes. The house where i was staying was 4x4 access only.

 

Yes the Autotrac works great in the snow. It is particularly nice when traveling on roads that are only partially covered with snow. It isn't instantaneous but it does engage very quickly.