i also have a 97 and have had the same problems and they are a PIA. best solution is exactly what you said covert it over to manual! they make the kits. i have seem them on summit and ebay. there are so many sensors, motors, and on yeah lets not forget one of fords many bright ideas...... the vacuum lines running by the engine!

i myself payed the price to get new lines and new fork in the front diff because i like things how they should be. but if they go again i will go manual!!!

 

Lift and support the front so the tires are off the ground. Key on engage 4Hi. Get under the truck to see if the front driveshaft turns. If it does the trouble is in the t-case or electrical. Most likely cause is the shift motor. Because the light is off I suspect electrical. While you are under there, still in 4Hi, spin one of the front tires. If the other one spins in the opposite direction the front axle is engaged.

 

Oh they do make conversion kits for that? Nice, im gonna look around see if i find em. Allot more dependable that the one i have. Mine only works when it wants to lol

 

http://www.4x4posi-lok.com/ Adjustment is critical to making it work properly.
Pro: positive engagement and allows 2Lo. Shift to 4Lo but do not engage front axle.

Con: It requires an extra step to shift on the fly. You must first engage 4x4 then pull **** to engage front axle. Extra inspection required to ensure the engagement mechanism doesn't seize over time.