1988 f-150 4x4 manuel shift transfer case with manuel lock out hubs drive in 2 wheel with the transfer case acting like it in 4 wheel with the hubs in the free position?

This really requires a test drive to start with.

But a couple things to check:

in 2 wd and hubs in "un-locked" position crawl underneath and see if the front drive shaft will turn, If it does not shake it and see if you can tell if the transfer case is locked in.

Next see if you can get the outer Knuckle U-joints to turn, if they both turn easily then the hubs a not jammed in the lock position internally. If one turns and the drive shaft turns with it then the other hub is jammed.

Finally bad outer Knuckle "U" joints will cause the normal 4 wheel drive steering shake and drag feeling when turning. Take a pry bar and see if they show slop when wiggled.