There are two different types of transfer boxes.
The first one build from 1979 to about year 2000. It is in the W460 and W461 trucks and are with the part time 4wd.
Standart driving mode is rear wheel drive and you shift it to 4wd Hi and Low (4 Strasse and 4 Gelände)
There is no differencial in that box, so 4wd should be used on a low-traction surface only.
http://www.youtube.com/watch?v=YShm9NKRU4M
Second style transfer box is permanent 4 wheel drive. Used in W463 on all models and in W461 from about 2001 and onwards.
It has a differencial to allow 4wd during ordinary driving conditions. You can select 4 Hi and 4 low. It has a 100% differencial lock you can activate to distribute the force evenly to the front and rear axels. Obviously when you activate that lock, the same conditions apply as the earlier style boxes - to be used on low-traction surface only.
This box can not be used in a 2wd mode.