Cycle the red lever a bunch of times and make sure that it is all the way forward when you get done. It sounds to me as if one of the transfer case selector rods is not sliding properly and you're only getting slightly past neutral when you try to reengage 2WD (or, less likely, you're not pushing the red lever far enough forward). Make sure you didn't damage the selector rod(s) dust cap on the front of the transfer case; The rods have to slide into and out of the dust cap freely.
--Mark
1973 SIII 109 RHD 2.5NA Diesel
0-54mph in just under 11.5 minutes
(9.7 minutes now that she's a 3-door).