The hard part is that the transfer case diagnostics aren't all that good. It's just too simple a box, and if they fill it with diagnostics then it'll need more electronics to watch the electronics.
If it's getting into 4WD then the servo is obviously working. If you have to reverse to get it out of 4WD it might be binding, which is usually caused by 4WD being engaged on a surface that's too firm, but the mechanism inside may also be reluctant to move too (doesn't happen often). It shouldn't be an oil problem, they put auto trans fluid into the transfer cases (you might want to check that someone hasn't dropped 85W gearbox oil in there!!).
Other than that, it's the wait and engagement switches. Does the servo turn ok?