1987 F-250 4X4 not working
 

I changed the lcoking hubs on my truck thinking it was the hubs that went out. Not the problem. I left the hubs engaged and the transfer case in "4-high" and crawled underneath to check the drive shaft from the transfer case to the front axle. Needless to say, I could freely turn the shaft.

I need some advise/help as to what my next step should be. Is it the gears in the axle that are out/bad? or is the transfer case bad? Any advise on what I should do next would be greatly appreciated.