2002 ZR2 4x4 Problems...Stuck in 4-high?

I have a 2002 zr2 4x4 with 117k miles (extended cab) and the 4.3 liter V6.
I just bought this vehicle.
The vehicle is making consistent clunking noises (which you can also feel) from the front end, similar to those experienced when switching to four low. These occur approximately every 10 seconds while traveling down the highway between 45 and 55 mph on relatively flat surfaces (but not while coasting).
Also, it appears the four wheel high is still engaged even when the button for two-wheel is lit. (I experienced the front wheel 'skipping' like a front wheel drive car while hard-accelerating from a stop). This has yet to be confirmed by lifting the vehicle off the ground and running it. As further evidence, the car makes no discernable change when shifting from 4-high to 2-high, but considerable change when shifting to 4-low.
I suspect the issue is two-fold:
1.) The electronic switch isnt engaging the two-wheel high.
2.) The transfer case is worn out from the consistent 4-high and needs to be fixed in some way.
So my questions are...
Is my control panel not working?
Also, do I need a new transfer switch?
Basically...are my suspicions correct?

I am doing a full diagnostic at a trusted, independent mechanic's shop tomorrow, although I would greatly appreciate your advice.
Thank you.
~zr2trucker

Check all axel joints and U joints and double joints.
If staying in 4W when shift button is in 2W get it on a transmission/transfer case scanner and test shifting and for codes.
Has the transfer case blue fluid ever been serviced or changed/
How many miles on it?
Does shift button lights work right or show 2W in 2W drive.
Is front axel still locked in in 2W drive?
MT