The interlock button just allows you to start the Pathy without stepping on the clutch. It has nothing to do with shifting into 4WD.
I think what happened is that you shifted the transfer case into neutral and didn't quite make it to 4-LO. From 2WD, the transfer case shifter lever should pull straight back one notch to 4-HI, then you need to push down on the shifter, pull it back another notch into neutral, then while still pushing down on it, pull ANOTHER notch back to put it into 4-LO. Does your 4-HI work OK? If so, there's no reason your 4-LO wouldn't be working. Your hubs may also be at fault, I can't tell without being there to see it myself.