So I'm thinking its a plastic fork inside the transfer case but I've never had it disassembled. I have always changed my oil on everything on my H3 before recommended and I use synthetic but I guess it doesn't stop some things from breaking. Advice is greatly appreciated.
Yes your plastic shift fork is worn away enough that it cant slide the lock collar far enough to engage the gear on the center diff assembly. 4 low usually still works as thats another shift assembly deeper in the case. Its not due to poor maintainence, just a poor decision on Borg Warner to save a few cents on cost of fork by making it out of plastic. I've changed several of these, its fairly easy to do. Be sure to clean the pump suction tube filter also as it gets plugged up with ground off fork debris.
I've also had one that wouldn't allow 4 lock to disengage. That required a new fork and sliding collar. Be carefull not to break off the pin on the end of the shift shaft. I learned the hard way once.
Parts usually needed are: 1 new metal shift fork, quality RTV sealant such as Right stuff or Ultra Grey (get the cheesewhiz can, it costs more but is much easier to dispense), couple quarts of dexron 6 and the gasket between the trans and transfercase, I had one with a split oil suction tube that feeds the lube pump driven by the rear output shaft. That 6 in piece of tubing was like $30. If the case has high miles it wouldn't be a bad idea to replace the transfer case input seal whilst you have the case out of vehicle. Should only take a few more minutes.
I have some pics to post if I can get the I-pad away from Mrs reloader who is hooked on that damned candy crush game.