normally if the transfer case was in neutral, this light would be on. then the truck would not move. i am pretty sure you will find the switch is causing you the problem. normally this problem will set a b2725 code in the transfer case module.
The NVG 226 transfer case features a rotary 4 mode shift control switch located on the instrument panel. When the ignition key is in the RUN position, the transfer case shift control module monitors the transfer case shift control switch to determine if the driver desires a new mode/range position. At a single turn of the transfer case shift control switch, the lamp of the new desired position will begin flashing to inform the driver that the transfer case shift control module has received the request for a new mode/range position. The lamp will continue to flash until all shifting criteria has been met and the new mode/range position has been reached, or has been engaged. Once the new mode/range position is fully active, the switch indicator lamp for the new position will remain ON constantly. During normal driving situations, the transfer case can operate in the Auto 4WD mode. In the Auto 4WD mode, the transfer case shift control module monitors rear wheel slip speed, based on the inputs from both the front and rear propshaft speed sensors. When the vehicle experiences a rear wheel slip condition, the transfer case shift control module sends a pulse width modulated (PWM) signal to an electronic motor, which is the transfer case encoder motor. This motor rotates the transfer case control actuator lever shaft, applying a clutch pack. This clutch pack is designed to deliver a variable amount of torque, normally delivered to the rear wheels, and transfers it to the front wheels. Torque is ramped up to the front wheels until the front propshaft speed sensor matches that of the rear propshaft speed sensor. Torque is ramped down to the front wheels. The process would repeat if rear wheel slip is detected again. The NVG 226 transfer case has the added feature of also providing the driver with 3 manual mode/range positions:
The driver may choose to select any of these mode/range positions while driving the vehicle. However, the transfer case will not allow a shift into or out of 4LO unless the following criteria has been met:
This transfer case also has a Neutral position. A shift to the Neutral position allows the vehicle to be towed without rotating the transmission output shaft. Neutral position may be obtained only if the following criteria has been met:
Once these conditions have been met, turn the rotary switch clockwise past the last and hold for 10 seconds. When the system completes the shift to neutral, the red neutral lamp will illuminate.