A transfer case's main function is to allow the user to send 50 percent of the engine's power to the front axle, without which four-wheel-drive would be impossible. Many transfer cases serve another purpose, though; as a kind of supplemental transmission, a high-low transfer case can give your truck a higher level of versatility.

Underdrive vs. Overdrive

Many new transmissions use a top gear that allows the transmission output shaft to spin faster than the engine, thus conserving fuel. Underdrive gears do just the opposite.

Torque Multiplication

Vehicles accelerate faster in first gear than they do in third because the transmission gears multiply engine torque output in exact proportion to their size. For example, a 2:1 gear will multiply 200 foot pounds of torque to 400.

Gear Multiplication

Transfer case gearing does not replace the transmission's gearing; it multiplies it. For example, if your truck's lowest gear is 2.5:1 and your transfer case's is 4.5:1, your lowest effective gear ratio will be 11.25:1.

Climbing Applications

Having the ability to greatly multiply engine torque when attempting to traverse such off-road obstacles as rocks, fallen trees and steep inclines can mean the difference between a triumphant ascent and an ignominious retreat in reverse.

Descending Applications

Since manual-transmission vehicles can use engine back pressure to slow the vehicle without braking, underdrive transfer cases can help as much on the way down as the way up. The same gearing effect that makes engine torque 10 times what it normally is on ascending also makes engine braking stronger by the same amount.

Source:

FourWheeler.com

Off-Road Review

Atlas

Resource:

Transfer Case Animation (Video)