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Transfer case position sensor is dead or unclipped
Just need to replace the transfer case position sensor. There's a few threads on it in the how to section. Quick 10 minute job from underneath the Jeep with a 1-1/2" socket.
i will even be kind enough to not make you search.
though you should....it is common....
http://www.jeepkj.com/forum/f202/how-change-t-case-position-sensor-quick-method-under-vehicle-51959/