I just went through the very same problem you are describing. Luckily I have a friend that owns an AC Delco certified shop and we were able to identify the problem. Unfortunately it's not a simple solution. There are two main suspects, one being the electronic encoder motor on the transfer case and the control module in the dash. They both act virtually the same, 2wd works, 4hi gets you 3 blinks of the green light then defaults to 2wd, 4lo works normally. It took me, my buddy, snap-on modis scanner, the GM diagnostic flow charts and a couple hours to eliminate the module. Unfortunately I kept resetting the encoder motor by pushing the 4 hi button in nuetral then jamming it into park while the green light was flashing. That would get 4 hi to engage but I'm pretty sure that's what ate the front differential.