Check the sensor that tells the transfer case it is locked. My buddy had one go bad at 180k and it wouln't let his diff locks work either. Pretty easy and straight forward fix as I recall. You might jack up all 4 wheels and see if the transfer is actually locked in low range. If it is, the sensor is your problem. Are you sure the light isn't burned out?
It does not feel like the xfer case is locked - I dont think it is. Actually kind of cool - no binding in tight turns, I'm going to get that switch now.
But I do need to fix this problem, its a 96 with 90K miles. Any other ideas?