Just went through almost the exact same thing with my son's '89 Montero. I could not get the transfer case shifter to move unless I really pushed hard, then it would barely move. <img src="/forums/images/graemlins/scared.gif" alt="" /> What I ended up doing was removing the center console from around the shifter, then removed the floor plate and boot, which exposed the shifter linkage. Sprayed a good quality penatrating fluid right where the barrel enters the transfer case. Really soaked it. Then I moved it to the center and worked it side to side for several minutes. Finally started working it back and forth after spraying some more. When I was done, you could move the shifter with 2 fingers! <img src="/forums/images/graemlins/kewl.gif" alt="" />
Of course, it goes without saying, that the transmission needs to be in Neutral and all preload removed from the drive train for the transfer case to shift.