A similar problem with my 1999 LS started Oct 2003 (on pressing 4hi, flashing 4hi or all lights out, then back to 2hi). After 4 or 5 new transfer case control modules, the dealer said it was fixed. NOT! Now (Jan 2004) after 9 days in the shop it SEEMs to be working with a new encoder and new transfer case control module; we'll see. Word from the dealer is these two parts should always be replaced together (a $1300 repair!!).
P.S. Twice prior, similar symptoms were relieved (maybe not fixed?) by pulling dash fuse 8 (courtesy lamps) for a minute, replacing it, and cycling the ignition 5 times from "off" to "run" ("to clear codes"). That procedure comes from some GM bulletin provided by the dealer.