If I read this correctly ( which I might not have, bit early for me ), the front drive shaft will engage ( from the transfer case ) but the front wheels are not engaged ?
If so, sounds like either the vacuum from the IWE ( Integrated Wheel End ) is not being released, or the IWEs have had an issue with part vacuum ( damage vacuum lines ) and the IWE gear is rounded off.
If you pull the vacuum lines at the IWEs ( there are 2 lines, 1 is the vacuum line, the other is the vent tube that routes up into the engine compartment and is not attached to anything ), the front wheel should engage ( might need a 5 * turn to mesh the gears ). With the vacuum lines off, jack up the front axle ( take precautions, chock the rear wheels, parking brake, jack stands, etc ) see if the front wheels are engaged ( turning one wheel should turn the other ). The option is to do this after the truck has sat over night, and the vacuum has been released out of the vacuum reservoir.
If the wheels turn correctly ( engaged ) I would think the contact plates in the transfer case are not making contact. Good starting point for this is the connector on the side of the transfer case, some times this gets gummed up, and the pins do not make good contact. The contact plates in the transfer case are used for a few things, one of them is to signal the IWE solenoids to release vacuum to the IWEs.
Operationally vacuum holds the IWE ( Integrated Wheel Ends ) out, and once vacuum is removed the spring engages the IWE.
Here is a black diagram of the IWE vacuum system