Good news and bad news... I have confirmed that the reason the transfer case was not shifting into 4low was because the N on the PRND123 would not light. After shaking wires and establishing some kind of connection, N lit up, so I managed to solve my original problem and the problem which is the subject of this post. I shifted into neutral, pressed 4low button, the lights flashed, I felt and heard a slight yet distinctive clunk sound. I pressed on the gas and could feel a distinctive difference in the way the truck felt after a foot or so (a little tighter?) so I thought I was good to go, and that it was in 4 low, but after about 4 or 5 feet, I heard a very loud clunking/grinding like the gears were bouncing around and not fully engaged. I immediately put it back into neutral, it made the grind/clunking noise again for a second but stopped when i got out of drive, and I was fortunately able to switch it back to 2 hi, and the truck drives...
I don't have any experience with 4wd except for what I had just done last night, so I may just be tripping on some normal 4wd noise, but I'm not convinced because it sounds really bad. From what I can tell, it may be the front differential, a wheel bearing?, or something in the transfer case. Not really sure where to go from here except for replacing fluid in the front differential. I already replaced the fluid in the transfer case a few months back with the blue stuff...
Well if it drives fine in 4WH with no noise then it more than likely is the Tcase. So that is where I would start. Changing the fluid in the front diff is easy, pull the fill plug, to make sure you can get it out, then the drain. Put drain plug back in and fill until fluid drips out of fill plug. Make sure you are sitting on a level surface.