I've got a 85 Cherokee with a 5 speed (Not that it really matters). When it is in 4x4 all works fine. When I shift it back to 2 wheel the transfer case shifts out and the front axle stays locked in. The differential actuator works if you apply vacuum direct to it so it works correctly. Could the problem be where the vacuum hoses attach to the transfer case. Could the switch on the transfer case fail? All the vacuum lines are good and tight no leaks.

Thanks......

The switch on the transfer case used to go bad frequently on the s-10's, maybe that is the problem.