Could be a number of things.
Start with inspecting the CAD (central axle disconnect) system on the passenger side axle tube. Check to see if the vacuum connector is getting vacuum in both directions when you cycle the tcase shifter with the engine running. When in 2wd it should have vacuum one way - when in 4wd the other side should have constant vacuum.
If its not cycling from one hose tube to the other as the tcase shifter is being cycled w/engine running, trace the vacuum hose back to the tcase connector for problems.
If its not cycling due to a vacuum problem, this *could* cause the dash light not to extinguish.