HELP! Problems with TOD (and transfer case?) on 2000 Trooper Automatic with TOD

Recently I observed the "check" light on the TOD console start blinking. I dutifully took it in to my normal mechanic for this and other problems (oil leak, new oxygen sensors). All the problems other
than the TOD were fixed. My mechanic advised taking the Trooper to an authorized Isuzu dealer for the TOD probem as it could be covered by the powertrain warrently (100000 miles, I have 78K). He also mentioned that in his opinion it might be a problem with the Transfer Case because he heard noises going in/out of 2 Wheel Drive to 4 Wheel Low. To my shame, I did not play with the 4 WD before taking it into the Isuzu dealer. I did however, relay my mechanics observations and of course point out the blinking check light.
The Isuzu dealer came back with a diagnosis of "DTC24 Sensor circuit short. Recommended replacing rear axle wheel speed sensor". The techician then went onto explain the problem, but franking, I'm not sure he's right (or I misunderstood him or I don't understand the Trooper that well).
He claimed that since the rear wheel speed sensor was not working, the TOD system could not transfer power to the front wheels as needed. Fair enough, but now the funny part. He said that TOD works in 2 WHEEL DRIVE! That is, you'll be driving along, you hit snow, sand, oil, etc and the TOD automatically senses the problem and transfers (some) power to front wheels. Since my TOD was not working, this would not work in 2 Wheel Drive. BUT, he said that by hitting the 4 Wheel High button, you force the car into four wheel drive and all would be well. Thus his recommendation was that I could ignore the problem if I didn't plan to drive the car in snow/ice in 2 wheel drive.
This is not how I understand the system to work at all. To my knowledge, in 2 Wheel drive, all power goes to back wheels. Period. In 4WH, the TOD kicks in and gives power to front wheels as needed. Anyone care to confirm?
The estimated cost to fix this problem was $563.46 for the sensor and $273.00 for the labor. This seems extremely high to me. Again, comments?
Finally, when I got home, I was playing with the trooper on pavement. I put it in 4 WH, and back to 4 WL just to see if perhaps the flashing light would go off. [It didn't]. Then (not wanting to leave well enough alone), I put the Trooper in 4 WL. It behaved as you'd suspect (low speeds, trouble turning). All ok. BUT, I can not get it back in 4 WH ( or 2 WH). I've tried a few times. I suspect there is a problem with the transfer case (as the first mechanic suggested). Again, any comments? Anyone know if the transfer case is covered by warrenty? The rear axis speed sensor?
Any help appreciated.
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I don't have TOD on my 98 Trooper, so I don't know about it, but I do know that the little book (Trooper Owner's manual) in your map compartment (glove box) should be able to tell you all about how it operates (or should operate). Have you read it? If so, does it make sense to you? If not, please do so, then let us know what it is supposed to be doing and what it isn't doing right. I think your understanding is correct, but I don't know. You will know when you read the book.
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