The problem is likely the transfer case has locked up, the question is do you need it to continue to be an AWD vehicle? If not a simple solution is to remove the driveshaft from the transfer case to the front differential case. Takes maybe 15-20 minutes and there are no leakage issues by doing so. The vehicle will now be a rear-wheel only drive one. I recently did this to our own 2003 model and as the car stays in the south, there is no need for the AWD. The car performs as expected and that binding problem is gone.
Have someone take a look at the transfer case,and also the driveshafts to make sure there not binding up,
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