Provided that the tail shaft of the transfer case is the same as my 96, the speed sensor indexes (rotates) in the bore to compensate for different diameter gears, which is what lets the ECM compensate for different gear ratios. The speed output is frequency based, and the manual has a chart for Frequency VS road speed. The signal from the sensor splices, one feeding the PCM and the other feeding the gauge cluster.
On my truck, it stopped reading. I installed a new sensor, and it also refused to read. I ended up having to index the sensor to a position marked for a tooth count that was different than the tooth count on the gear I have. (if you look at the case, tooth counts are cast in to the housing) That leads me to believe I had a problem with the gear on the tail shaft, be it lack of friction or otherwise worn.
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