The flashing is reporting that the GEM computer which controls the Control
Trac 4WD system (as well as other things) has detected a problem, and likely
in your situation it is one of the speed sensors mounted in the transfer
case. The way the system automatically increases power to the front wheels
is by monitoring the relative speeds of the front and rear driveshafts. If
the rear is turning faster than the front, it must be slipping, so the
transfer case clutch engagement period (it is pulsed) is increased in
increments until the speed of the rear is equal or less than the front. If
it gets to full engagement (locked transfer case, like selecting 4WD-Hi) and
this speed difference seems to remain, the GEM realizes this cannot be, so
it shuts off the 4WD and flashes the lights inside.

These are Hall-effect sensors that read the passing of gear teeth to send
pulses to the computer and many have found that just cleaning them helps,
probably because metal bits get caught up in the teeth or on the sensor face
over time. Connectors should also be checked, or the sensors can just be
replaced. As I recall, there are 3 in the case, but only 2 have to do with
the 4WD function...I think the other was for vehicle speed.

=Vic=
Bear Gap, PA

1998 Explorer in UK- Finding anybody who has any knowledge Nill. Even
Ford Main agents I have tried and at £60 per hour experimenting is a
difficult pill.
Further to your problem above I have a similar problem with lights and
a smart GEM Looking allover  I found that if  removed the battery power
and reconnected in 1 hour reset GEM and its fine except, If I move to
Low 4WD it stays in this mode - to fix remove batt lead reset all OK.
Any body help. Is this to do with the cam, motor, dirt , sensors etc