The output speed sensor failing should only prevent upshifting out of 1st. Interesting that the TCM threw codes for something at all, much less failing solenoids. I kinda wonder if you had a wiring issue too.
I wondered that too, to the extent of my replacing the transmission wire harness that runs from the firewall to the transmission; i.e., to each solenoid as well as the input and output shaft speed sensors. The $500 O'Reilly scanner showed failures of each of the three solenoids, in addition to one that I had begun to suspect: the "output shaft speed sensor circuit"
That was a bit tough to swallow, since the transmission shifted perfectly, as well as engaged the torque lockup. Maybe it's worth noting that my sole concern was to extinguish the MIL. The Jeep drove nicely, and still does, but now w/o the MIL illuminated.
Replacing the entire harness had no discernable effect.
Balking at O'Reilly's $106 price for the output shaft speed sensor (OSSS) I came home, fished around in my junk bucket and located a couple of OSSS's and tried one out. I then killed the stored codes with my cheap-ass scanner, and about 80 miles later, no codes of any kind and more importantly, no MIL. (as an aside, the output and input shaft speed sensors are identical)
I have a sneaking suspicion that the AW4 control module -- and/or perhaps, the vehicle ECM is smart enough to rely on the VSS when the OSSS circuit fails, but still illuminates the MIL. Just a wild guess, but consistent with my observations and experience. And with full realization that the VSS is downstream from the transfer case, meaning that the VSS and the OSSS would read the same rpm only when the Xfer case was in 'strait through' operation.
Lastly, every electrical component on the Jeep works perfectly with the following exceptions: The airbag light is almost always on and the rear gate window wiper does not work when the airbag light is on. But (and this is a big butt) the airbag light and the failure of the window wiper are perfectly in sync. Just to be clear: When the airbag light goes off (as it sometimes does) the wiper will work. When the airbag light is on, the wiper won't work. LOL! The transmission marches to its own drum, completely independent of the airbag and rear wiper. So far.
But the MIL is no longer staring me in the face.