umm.....
from someone who had a similar problem and STILl had not figured out the issue i would suggest reading up on the "how to swap an electric transfer case to a manual transfer case" section!
it is what i ended up doing and, let me tell you, worth every penny!
so lets get to your problem....
i had the same thing with my 95. it was working fine one weekend, then next weekend no 4 wheel drive at all.
first thing to do is check the transfer case motor. disconnect that sucker and make sure it's clean and then hook up a car battery to the power leads and make sure it spins both directions. look in the tech library for help with this.
if this doesnt work then your on to pure electrical problems. now your pulling apart the dash!
in the center console where the radio is, you will have the GEM module, and a...i believe Solenoid. all this controls the 4 wheel drive. there is also a 4 wheel drive control module in the rear cab behind a jumseat (extended cab) or below the rear window buried......or even buried in the trim right next to where the passenger's right foot would be.
Start with the switch itself. it's a limited resistance switch and whole turned will provide different resistances. test this with a good old voltage meter. it helps having a freind into electronics like i do. somewhere in the tech sections or the shop mnual are the correct specs for current.
Locate the 4 wheel drive control module. good luck searching those two or three spots and pulling everything apart, but once you find it.....make sure all connections are clean and free of dirt/grime. theres also a push button to test the sucker. and lastly take a volt meter and start testing.
if this is not the solution, try replacing the solenoid behind the radio outright. they are dirt cheap and easy to replace.
if all three of these things do not cure your problem, nect is the GEM module.
start testing all the current here also. and if you still cant solve it, you can spend 500 dollars on a new GEM module, or hopefully find one second hand!
and then pray to the lord or any other god or god like entity as you replace this that it will cure your problem!
for me it did not so now i have a stick right next to my manual shifter that lets me go into 2 wheel drive, 4 hi and 4 lo and i get to smile and give the dasboard the one finger salute as i do it.