[old_master]

If you're sure the front axles are locked in, power is not being transferred to the front differential. Power is taken from the transmission output shaft and directed through the transfer case to the front driveshaft and sent to the front differential. The front differential is "live" all the time. The front hubs are splined to the axle shafts and are turning any time the vehicle is moving, independently from the front differential. When you "shift" into 4WD, an actuator engages a pin in the front axle housing and mechanically locks the axles to the differential. Check the operation of these things and you'll find the problem.

Regarding RPM increase letting off the gas: That is the lockup torque converter disengaging, and is normal operation. It unlocks for several reasons: #1 It increases available engine vacuum to the brake booster anticipating a stop. #2 To help slow the vehicle more quickly. #3 It increases engine RPM in anticipation of the next throttle application when more engine torque is necessary, higher RPM, more available torque.

Concerning the lack of power: Is the "Service Engine Soon" light on? If so, what codes are stored? Need more information to attempt a diagnosis on this.