did you do anything to test and verify that the center diff is NOT locked? (like turning tight corners on pavement or something?). Once you have determined that it really is unlocked but light is still flashing, I would check your transfer case oil level and condition. Might not be the problem, but worth a shot. After that you will have to get your hands on a wiring diagram and test and troubleshoot the detection switches on the transfer case, there are quite a few of them.

97 Montero SR w/Mitsu Adj Shocks & Rear Diff Lock ARB Front Diff Lock 4.9 Ring/Pinion 3.15 transfer box 43:1 crawl ratio 2" suspen lift 2" body lift 2" Gas Tank Lift 35x12.5 MTRs 15x10 Wheels Rock Sliderz ARB front bumper w/12k winch Custom rear bumper