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What a mess... it could have been worse for you and the rest of the truck! This is also my first 4wd and I don't use it so I just took my front shaft out last week, lubed it and hung it in the garage. What all keeps spinning in the transfer case when it's in 2-HI? Hopefully the front output shaft is disengaged from the rest of the innards.
 

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"The chain and both sprockets keep spinning." I thought that looked like the lower chain sprocket in the picture and it didn't look like there is any disconnect between the sprocket and the shaft. So my next guess is... the later models with CAD only disconnects one axle and the other axle still spins the spiders and the inner shaft on the other side. In other words, it's less resistance to spin the spiders and stub shaft than to spin the front drive shaft and TC sprockets and chain.
That makes unlocking hubs look WAY more necessary and not just a luxury! I'm 69 and if I live long enough to need bearing hubs again, they will be unlocking.
 

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Yes that's it. I didn't know so many parts turned even when not in 4wd. Am I right about CAD?
 

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After 3.42, you’d be amazed at how well 4.10s are for towing! I’ve had two other drws that had 4.10s and I DD both of them for about 9 years each but fuel prices weren’t what they are now. My 03 ctd 6 spd w/4.10s got 19.8 empty hiway and 18.3 city. My other drw w/4.10s was a 75 chevy c&c and I put a 455 olds in it and we won’t talk about that mpg!
You don’t tow very heavy so 3.73 might work good for you but then you need to decide if you only want to go 2 steps.
i like my 3.73s w/ stock ~31” towing 15k but I would also be very happy with 4.10s bcuz I tow so much.
my 12 had 34” on it when I first got it and the PO towed a 10k cargo trailer.
 
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