[2. See if the actuator pulls the front axle cable to engage it. If not and all hoses are good the diaphragm may be leaking on the actuator. If it engages but the light is still flashing remove the indicator switch on the front axle (only electrical plug in there) and manually push it in with the connector plugged in and see if the light stops, if so replace.]
As I understand this muddog's step 2, to test the front axle indicator switch, if I remove it and push it in manually and that works, does that not confirm that the switch is good? and that the axle is not fully engaging so that the differential internal workings are not pushing in the indicator switch correctly?