I finally found time to tear-apart the rear hub and figure-out why the hub has been grinding all of a sudden after only 700 miles: in a word...RUST.

The drive-side was fine, however, the non-drive side of the hub was full of brownish-red grease mixed with water. The difference in the condition of the bearings pretty much tell the tale. The cup on the non-drive side was corroded, but I managed to clean it up. You can still see the tarnish marks in the cup races and rust in the upper lip of the cup where the dust cap is pressed.

Hopefully a new set of bearings and some waterproof synthetic grease will get things rolling smoothly again.

UPDATE: I picked-up a set of 18 x 1/4" replacement ball bearings from my local PerformanceBike shop for 10 cents each, threw them in the hub along with some fresh grease, slapped the whole thing back together and all is good again. Better than new, actually.

HINT: Keep the non-drive side of your hub dry...wipe it down after every wet ride. "Sealed bearings" have a silly way of actually sealing water IN the bearings, instead of out.