So the Axle VSS sensor did not work. Any ideas why? I am somewhat lost on this and it was a shot in the dark. Jaime? Anyone?
I'm not 100% sure but I think the axle's sensor is different from the T-case's sensor.
First, the t-case's sensor, for a 1st gen, is I think gear driven and, although I have not seen the signal, I'm pretty sure its totally different than the signal being produced by the axle's sensor. The axle's sensor (if its like the 2nd gen's) is a solid state design which produces a sine wave due to the rotating tone ring passing in front of it - and this tone ring has something like 110 or so teeth. So you'll get a sine wave that goes up and down 110 or so times per rotation of the tire - a signal which I dont think the t-case's sensor can reproduce.
Secondly, the ring and pinion gears offset the tone rate so if the axle's sensor is producing (for example) 100 sine waves per revolution and you're running (for example) 4.56 gears, the transfer case's sensor will need to mimic about 22 sine waves per revolution of the output flange since it rotates at 4.56 times the rear axle (100 / 4.56 = 21.9-ish).
So how can we get around all this mismatch? Well the two biggest "known unknown" variables here are:
1) How many times the t-case sensor rotates per 1 revolution of the t-case's output flange.
2) What type of signal the t-case's sensor produces.
So we can eliminate unknown #2 off the bat by using the stock t-case sensor. As for #1, well we can do some digging (take apart the t-case) and figure out how many times the stock t-case sensor rotates per 1 revolution of the t-case's output flange. From here, we can use this stock t-case sensor, mount it externally, and put on some diameter wheel mounted on it rubbing against the output flange of the t-case. The diameter of course would be such that the sensor rotates at the same rate as if it was still mounted against the gear inside the t-case. There are obviously other solutions of how to drive the stock t-case sensor but this is just one quick (crude) method.