Possibly a broken chain or a fried clutchpack in the transfer case, I'm gonna go with a toasted clutchpack as you seem to have some torque applied to the front axles, hence the TOD lights showing output...
Ya know, it is possible that if someone filled the transfer case with hypoid gear oil or anything but the recommended ATF that the clutchpack is slipping that badly. In which case, a change to the proper fluid could correct the problem...wouldn't that be nice!! Definitely worth a shot...