I'd like to report that I solved the issue after 3 years. A lesson for all to never give up! The old girl works 100% and was sold to a fellow 3rd gen enthusiast today. I wanted to update folks who might come across this thread in years to come.
As mentioned by [MENTION=68424]calimobber[/MENTION], removing the actuators are a total PITA. But, after replacing all of the sensors, switches, fluids, and computer, I decided to bite the bullet and pull the transfer case actuator. I had previously noticed that the vent hose on the transfer case actuator had become loose and tattered. Be sure to inspect your rig, snip the tattered end and re-attach and zip tie that sucker! If your hose is disconnected, there's probably a bunch of trash inside your actuator assembly.
The complete actuator assembly cannot be simply removed without disassembling the transfer case. However, the lower half is held in place by three 10mm bolts. Be very gentle when pulling the lower half. The gear will most likely be under load. You do not want to the tensioned "spring" attached to the gear to become undone. It can be put back together, but it sucks. Slowly pull the lower half until the load releases.
Here's what I found:
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The actuator stopped working shortly after I had purchased the truck at 173k. The vent hose must have been disconnected for years. The lower half of the actuator was trash. The armature was completely rusted and seized.
If your truck stopped working in AWD or 4WD, you can manually turn the gear to unlock the center diff and place it into 2WD. I believe you have to turn it counter-clockwise to place it into 2WD. I might have forgotten, so check your tire rotation. Your truck will need to be on stands in order to inspect the rotation of your wheels. All of your switches should be set to the 2WD and unlocked position.
I was able to find this beauty at the local pick-n-pull:
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I cleaned the old Toyota grease and put some electrical contact grease I had on hand. I carefully aligned the lower half and shimmed it into the gear portion. Don't try to force it in, it should fall into place relatively easily.
Here is what it looks like if the gear is removed. Try your hardest to leave the gear attached if it is not damaged. Note the tattered end of the breather hose and the sheared bolt--be careful if you live in the rust belt:
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Re-assemble and inspect that wheels are still in 2WD. Again, the gear is under load and can slip into the locked position when the lower half is being re-attached. I disconnected the battery for a few minutes to reset to computers. The flashing lights should come off. While your truck is still on the stands, turn it on and inspect operation.
I'm not sure if this can be applied to trucks without the multi-mode transfer case. Preventive maintenance is key folks. Inspect your breather hose on both actuators! I hope this helps someone.