I was able to bypass the lockout actuator. Since there's not much here on what's involved, I though I would post what I did. There's an adapter between the actuator body and the air line. This adapter is compression male (for the air line fitting) to 1/8" NPT male (for the actuator). I bypassed the actuator by capping the NPT side of air line adaptor and installing a plug into the actuator (both 1/8" NPT) using a little pipe thread sealant. Do not use Teflon tape.
I tried to cap the line the cheap way by using a rubber vacuum cap and a hose clamp, but 120 psi air line pressure popped the rubber cap like a balloon. You will need to use a proper 1/8" NPT cap and sealant to ensure reliability and leak-free operation. I recommend brass fittings for corrosion resistance.
The transfer case now shifts easily in neutral, although you may need to move the truck slightly to get the T-case to shift all the way into Low or back into High. This is similar to a motorcycle or ATV that has to be "rocked" a little back-and-forth to get it into neutral.
Also, there's much less lever movement than I would have thought shifting from High to Low range. The lever only moves about 30 degrees from horizontal when shifting from High to Low.
So to sum up, my problem was T-case wouldn't shift into Low at all. I disconnected the linkage, lubed all the pivot points, and worked the T-case lever until it was easier to move and I could move it through the entire range of travel with even resistance. I also removed the washer which engages the FWD in low, which now allows me to select FWD manually in either High or Low range. After these repairs, the T-case wouldn't shift with full air pressure but would shift with no air pressure, so I bypassed the lockout actuator by capping the line and plugging the actuator. It's not necessary to plug the actuator, but it does keep water trash from getting inside the actuator should you choose to reconnect it later.
Hope this helps.