[quote=JCL]The point I don't get is the assumption that the car thinks the tires should be going a certain rotational speed. The only way the car knows how fast the tires are going is by the wheel speed sensors. It doesn't have another reference signal, relating engine speed to true ground speed. There is usually a torque converter in the equation, so it isn't possible to just compare engine speed to driveline speed. You could have an issue with the torque converter locking up, separate from any problem in the transfer case.quote]

There are accelerometers in the transmission that always know actual vehicle speed. When the abs sensor detects wheel speed that does not correspond to actual vehicle speed it goes into default. That is the only explanation I can come up with.