sounds like the fork for the 1-2 gears quit working or broke - also could be that the internal linkage is way out of adjustment. The manual will help with that. I see you found rebuild kits for this tranny - front input shaft bearings are a common fail on these trannies. The reason both shifters appear to be in the transfer case is that the 2wd and 4wd trannies are the same - the tailshaft for the 2wd is replaced with the transfer case housing, so the length is about the same. You can also use a starquest tranny - these trannies are built heavier to withstand the power of the turbo 2.6 motors they run.