On earlier models, I believe including the 99, there was a special AWD/FWD fuse holder near the firewall on the right hand side. (On later models there's a fuse slot in the main fuse box on the left side of the engine compartment.)
When a fuse is inserted into the special fuse holder (or the AWD slot in the main fuse box on later models), the AWD is disabled and the AWD (or FWD) warning light should come on. Otherwise, when there is no fuse in the holder, the car is in AWD mode.
All the fuse (Subaru refers to it as a "switch") is doing is grounding a logic circuit in the transmission control module, telling the TCM to turn off the AWD (i.e. disengage the transfer clutch fully, and permanently, as long as the fuse is in the slot). Consequently, any spare fuse can be used to disable the AWD.
If there is a fuse in the AWD/FWD fuse holder then the AWD should be disabled and the warning light should be On. But, then, that assumes that the fuse and the connections to it are good, and that the warning bulb itself is good.
he showed me where it was.
Could you describe where the fuse that you are referring to is located, or post a photo?
(Woops -- I see I doubled with cougar70. Oh well. I'll leave this in for now.)