1998 Ford Explorer Chattering in Auto 4Wl

Not long ago I began noticing a chattering or slipping sensation in the drivetrain when acelerating. This problem seemed to exit only in Auto 4wl drive. At first the dealer told me it was the new tires that were installed at Walmart as there circumferences were not the same. I had one tire replaced but that did not solve the issue. I returned the vehicle to the dealer, now they are telling me that I need a new transfer case and driveshaft at the cost of $2,400.
I asked them if there was any way to disconnect the Auto feature and they did so by disconnecting a plug above the transfer case. Now the vehicle operates smothly in two wheel drive, but of course I cannot shift into 4wl High/Low.

I would just like to be able to understand this problem. I have it in my head that this problem is an electrical or sensor issue, not the entire transfer case. By the way this is a two owner SUV that has been serviced as recommended by Ford, including the transfer case. Please let me know what you think?