Believe it or not it could be as simple as the IWE solenoid fluctuating resistance. I'm only guessing here but I've got an IWE solenoid sitting here that'll allow the 4x4 indicator to light up but it won't actually plug vacuum (leaving hubs unlocked). Other guys have had the IWE solenoid fail and the 4x4 light doesn't come on at all (similar to unplugging it - same results). I think the computer measures the load on it when it's engaged.
Again, only guessing but it could be as simple as that. It could even be the transfer case motor not contacting properly.
I know this doesn't help, but do you have an IWE solenoid you can test with? Start there?
Just to add... Does the 4x4 LO light come on? Or literally when going into 4x4, it only blips and that's the last you see of it until you cycle through again?
Last edited by homer; 01-26-2013 at 04:10 PM.