This issue was on my 2006 Chevrolet Silverado 1500, Z71, 4X4. My first sign of trouble on this was the "Service 4WD" message across my DIC, and code C0327 was scanned with EFI Live. I noticed the 4WD switch indicated 4LO, which I knew couldn't be the case since it was in 2HI. I drove down the road and experienced some very strange shift problems. The trans was shifting like it was in 4LO but the front diff was not engaged. Upon further research I found that the encoder sensor has been known to cause similar shifting issues. Since the encoder is sending the wrong signal to the Transfer Case Control Module which in turn tells the transmission to run on 4LO shift tables. So I ordered the sensor and started wrenching. The Encoder Motor Sensor is mounted inside the Transfer Case Shift Motor, this requires removal of the Shift Motor from the transfer case and then disassembling the motor to change out the sensor. The sensor sends a feedback signal to the Transfer Case Control Module (TCCM) telling the TCCM which gear the T-Case is in. Any deviation from the request and action will pop the "Service 4WD" MIL alerting the operator of a problem. Removal Procedure for transfer case motor/encoder 1. Raise and suitably support the vehicle. Refer to Lifting and Jacking the Vehicle in General Information. 2. Remove the transfer case shield. 3. Remove the front drive shaft.Mark the shaft first. On the rubber boot, remove the clamp and slip the boot back a bit. 4. Remove the motor/encoder electrical connectors. Slide the gray lock tab out before pulling the connections apart. 5. Remove the motor/encoder mounting bolts. 6. Remove the motor/encoder assembly. 7. Separate the encoder motor assembly from the transfer case and place it on a work bench. Now it's time to take the shift motor apart. 1. Remove the four screws on the outer perimeter of the encoder motor housing. Important: For proper timing and ease of reassembly, hold the gear in place as your remove the cover from the encoder motor assembly with your thumb or finger. 2. Carefully remove the cover from the encoder motor assembly. The cover has a seal on the bottom side. Place the cover in a position to protect this seal from damage and/or contamination. _________ Splitting the casing: Important: Observe the location of the punch mark on the large gear in relation to the timing mark on the housing if the transfer case was placed in the 2HI for the NV263 (NP1), or Neutral for the NV246 (NP8). The timing marks should be within one tooth of proper alignment. If not, you must note the timing mark positions for reassembly. I used a Sharpie as well as the timing marks. Locate the two shims; one on the small gear and another on the larger gear. Set them aside on a clean surface for reuse. Important: After removing the large gear from the housing, a dark gray phenolic spacer should remain in the casting where the bottom of the large gear resides. Locate this spacer and save for reuse. Carefully lift the large gear from the housing. The sensor and wiring harness will come with the gear. Disconnect the wiring from the sensor. Separate the sensor from the large gear. Ensure the phenolic spacer is in position in the housing. Important: The sensor has two (2) keyed areas which must be properly positioned when reassembled. The bottom of the sensor has a positioning pin that must be positioned in the cavity in the housing. The sensor key must be properly positioned over the key way in the large gear. Follow the step by step instructions below for ease of assembly. 1:Carefully position the new encoder sensor to the large gear aligning the key way slots. Just begin the insertion of the keyway over the key. Press the sensor onto the large gear using a ¾ inch deep well socket. This will ensure proper installation of the sensor. Notice: Not using the socket to press the sensor on may result in damage to the sensor. Part Number: 2: Connect the wiring harness to the sensor. The wiring harness connector wording (TOP) must face up or toward large gear. 3: Position the sensor and gear into the housing with the positioning pin seated in the housing. Align timing marks on the large gear and housing previously mentioned. 4: Reinstall the shims on the small and large gears. 5: Ensure that the wiring harness is properly seated in the housing. 6: Replace the encoder motor cover seal. 7: Reinstall the cover with the four (4) screws. Tighten Tighten the two (2) long screws to 3.38 N·m (30 lb in). Tighten the two (2) short screws to 2.25 N·m (20 lb in). 8: Place the encoder to transfer case gasket into position on the dowel pins in the transfer case. 9: Reinstall the encoder motor assembly to the transfer case. Tighten Tighten the bolts in the sequence shown to 20 N·m (15 lb ft). Reinstall the front drive shaft and skid plates that were removed previously. There is a clamp that holds the dust cover in place on the drive shaft, I did not have a part number for it but I was able to get one at my local parts store. The whole process looks a heck of a lot harder than it was. I would say it took less than an hour to do and I was only out about $75 which would have been what the dealership would charge just to look at it. I opened up the old sensor and found some oil in it, my shift shaft seal is leaking just enough to drip into the sensor and cause this problem. I kept the old one for next time or until I get a new seal installed. I hope this helps someone down the road, feel free to contact me if you have a similar problem. I'll offer all the help I can.