The GM transfer cases for model years 1998-2007 use a gear pump inside the case that is driven off the mainshaft. Because the pump is driven by the mainshaft, the housing of the pump must ‘float’ in the rear housing. There are five tabs on the pump cover that fit into spots in the rear housing to position the pump. Over time, the pump will start to wear on the rear housing.
Being that the contact area is very thin, it will wear a hole in the rear housing and cause a very small leak. This leak is high enough in the case that it typically will not leak when the vehicle is not moving and therefore will not leave any drops on the ground. Typically the condition is not found until there is transfer case damage from running the case out of fluid.
Merchant Automotive developed a pump cover with a maximum contact area to prevent this problem from happening. Avoid costly repairs by purchasing a Merchant Automotive transfer case pump upgrade kit, part 10001.