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I searched the forum and the internet quite a bit to find someone that had similar problems but came up empty. It is a 1987 Range Rover with the LT230 transfer case just to be clear.

Basically the four-wheel drive isn't working correctly. If I drive it without the diff lock engaged (lower right position) it will drive for a little while and then suddenly the engine will rev up and there will be no power to the wheels. Like it slipped out of gear or something. It does that in both the low and hi range positions in (the normal un-locked diff).It won't go back into gear after putting it into neutral either, you just hear the transfer case spin.

If I engage the diff-lock (left-position) it will drive fine, but the front wheels aren't spinning. It won't pop out of gear like the normal position, but the front wheels don't seem to have any power. I tested it out in snow and on a gravel road after getting it stuck.

Here is other things I noticed:
Normal Postion ( un-locked diff) Front drive shaft is spinning, rear doesn't seem to be spinning after it "pops" out of gear.
Locked Postion Front driveshaft spins, rear driveshaft spins, no power to front wheels.

I narrowed it down to either: Blown up transfer-case, Broken front differential, Broken cvs in the front axle, and/or all of the above! I wouldn't be surprised if the previous owner drove it for with the diff-lock engaged.

Has anyone else had this happen? After reading too many posts I've confused myself. Maybe the answer is right in front of me, I just need some thoughts before I start tearing into this thing or sell it.
 

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As Ian suggested, start at the front. Jack it up, axle stands under the front axle. Get friend 1 to hold propshaft/drive shaft get friend 2 to hold one front wheel, try to turn the other wheel, if it turns without turning the propshaft/drive shaft you defenitely have an front axle related problem
 
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