I suspect that's what he was looking at when he was looking at the speed sensors... The range that the GEM will see is 0-225 mph on the front, 0-255 on the rear. I'm not sure how the system interprets those numbers, so they may not be the actual vehicle speed. The PCM interprets the signal from the VSS by taking into account the final drive ratio and tire size before outputting the signal to the dash, so that could explain the discrepancy. AFAIK, the OSS sensors are strictly GEM inputs.
At any rate, it sounds like whatever shop you took it to has a great technician that knew right where to look. I would agree with him that it may not be worth throwing parts at it just yet. (In fact any mechanic that says that to my face automatically gets called 'reputable' and wins brownie points!)
As for the problem, it's quite possible that you simply had a bad connection at the transfer case causing one of the signals to drop out. When you unplugged it and reconnected it last night to test it, you may have temporarily fixed the problem. If it was a connection issue, moving the wiring and sliding the connector apart and back together could certainly have reseated the connection.
Unfortunately, you've discovered how difficult it is to track down intermittent electrical gremlins. If it was happening all the time, the source is easy to track down.
As for the PIDs, that stands for Parameter Identification Index. That's basically just a list of inputs and outputs that the GEM sees. By watching those, if you had a speed sensor dropping out, you'd see it as the front or rear OSS changing when it shouldn't, or if it was locked up, but the 4wd Electronic Clutch Output Status was set to 0%, you'd know something electrical was shorting to the brown wire and energizing the clutch... By seeing what the GEM is seeing and doing, you can get a better idea of why the system is doing what it's doing.
Make sense?
If it'll help, here's the diagnostic procedure from the service manual:
(I wish I could print out all the details, but they only open one at a time...)
Transfer Case
PINPOINT TEST A: THE VEHICLE DOES NOT OPERATE PROPERLY IN AUTO AND 4WD HIGH MODES
² A1: CHECK THE IGNITION STATES — MONITOR THE GEM PID IGN_GEM
² A2: RETRIEVE THE DIAGNOSTIC TROUBLE CODES
² A3: CHECK THE 4X4 HIGH LAMP INDICATOR — TRIGGER THE GEM ACTIVE COMMAND HIGH LAMP
² A4: CHECK THE 4X4 LOW LAMP INDICATOR — TRIGGER THE GEM ACTIVE COMMAND LOW LAMP
² A5: CHECK THE 4WD MODE SWITCH IN THE AUTO POSITION — MONITOR THE GEM PID 4WD_SW
² A6: CHECK THE 4WD MODE SWITCH IN THE 4WD HIGH POSITION — MONITOR THE GEM PID 4WD_SW
² A7: CHECK THE 4WD MODE SWITCH IN THE 4WD LOW POSITION — MONITOR THE GEM PID 4WD_SW
² A8: CHECK THE 4WD MODE SWITCH IN THE AUTO POSITION
² A9: CHECK THE 4WD MODE SWITCH IN THE 4WD HIGH POSITION
² A10: CHECK THE 4WD MODE SWITCH IN THE 4WD LOW POSITION
² A11: CHECK CIRCUIT 465 (W/LB) FOR OPEN
² A12: CHECK CIRCUIT 465 (W/LB) FOR SHORT TO GROUND
² A13: CHECK CIRCUIT 465 (W/LB) FOR SHORT TO POWER
² A14: CHECK CIRCUIT 359 (GY/R) FOR OPEN
² A15: CHECK CIRCUIT 359 (GY/R) FOR SHORT TO GROUND
² A16: CHECK CIRCUIT 359 (GY/R) FOR SHORT TO POWER
² A17: CHECK THE SOLID STATE CLUTCH RELAY
² A18: CHECK THE SOLID STATE CLUTCH RELAY SWITCH MODE
² A19: CHECK THE SOLID STATE CLUTCH RELAY COIL CIRCUIT — MONITOR THE GEM PID 4WDCLST
² A20: CHECK CIRCUIT 275 (Y) FOR SHORT TO POWER
² A21: CHECK CIRCUIT 400 (LB/BK) FOR VOLTAGE
² A22: CHECK CIRCUIT 275 (Y) FOR SHORT TO GROUND
² A23: CHECK CIRCUIT 275 (Y) FOR OPEN
² A24: CHECK THE ELECTRIC CLUTCH — ENERGIZED
² A25: CHECK THE ELECTRIC CLUTCH — NOT ENERGIZED
² A26: CHECK THE VOLTAGE TO THE ELECTRIC CLUTCH — GEM ACTIVE COMMAND ACCY RLY ON
² A27: CHECK THE VOLTAGE TO THE ELECTRIC CLUTCH — GEM ACTIVE COMMAND ACCY RLY OFF
² A28: CHECK CIRCUIT 779 (BR) FOR SHORT TO POWER
² A29: CHECK THE VOLTAGE TO THE SOLID STATE CLUTCH RELAY — CIRCUIT 400 (LB/BK)
² A30: CHECK CIRCUIT 779 (BR) FOR OPEN
² A31: CHECK THE FRONT AND REAR DRIVE SHAFT SPEED SENSORS
² A32: CHECK CIRCUIT 539 (PK/LB) FOR SHORT TO POWER
² A33: CHECK THE VOLTAGE TO THE FRONT AND REAR SHAFT SPEED SENSORS — CIRCUIT 774 (LG)
² A34: CHECK CIRCUIT 774 (LG) FOR OPEN
² A35: CHECK CIRCUIT 774 (LG) FOR SHORT TO GROUND
² A36: CHECK CIRCUIT 359 (GY/R) FOR OPEN
² A37: CHECK THE FRONT SHAFT SPEED SENSOR CIRCUIT 236 (BK/LG) FOR OPEN
² A38: CHECK THE REAR SHAFT SPEED SENSOR CIRCUIT 772 (LB) FOR OPEN
² A39: CHECK THE VEHICLE SPEED SIGNAL — MONITOR THE GEM PID VSS_GEM
² A40: CHECK CIRCUIT 679 (GY/BK) FOR OPEN
² A41: CHECK THE THROTTLE POSITION INPUT—MONITOR THE GEM PID TPI
² A42: CHECK CIRCUIT 357 (Y/W) FOR OPEN AND SHORT TO GROUND
² A43: CHECK CIRCUIT 357 (Y/W) FOR SHORT TO POWER
Hope that helps!
