All ZJ transfer cases are mechanically shifted no vacuum operation. The tube on your front axle is the diff breather tube to vent any pressure from building up in the axle.
Check your shift linkage, the torque shaft bushing is a common failure and it wont shift properly if its not in place. In the pic below you can see the body side bushing has fallen out of place on the torque shaft part of the transfer case shift linkage. Also check to make sure there are little green bushings in all 4 of the connections where the shift linkage meet the tabs all located under the Jeep, one on the bottom of the transfer case shifter, two tabs on the torque shaft and one on the shift tab on the transfer case should all have little green bushings in them too.