as you may know you cannot drive conventional 4x4s on pavement in 4WD.. the axles bind up. so to have a full-time 4x4 there is a differential in the transfer case that allows some slip between the front and rear driveshaft (same theory as the differential in an axle. without it you'd ruin tires and not be able to turn very easily)
so "hi" and "lo" are for pavement/hard-pack, every day driving. when you put the lever in LOC it removes the differential action, locking the front and rear driveshaft together and its just like a regular 4WD truck at this point. only for off-road conditions.
for what its worth lo-range is just a 2:1 gear reduction for bad terrain, more power, etc.
hope this helps..
mike
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