Kenny:

Thanks for your advice. I will be checking today with few 4x4 shops in the area to find out if the loose needle bearings are acceptable. You are right that the needle area from the hub bearing assembly was rusty but there was grease around it. The hub lock had really fallen apart and it was difficult to turn the **** from Auto to Manual.

I looked at the shaft area where it goes into the needle bearing and I do not see much wear. Since there is no pre-load on the needle bearing - just the thrust washers holding it in place - I do not see how it can be tight.

The rust likely came from a broken vacuum hose where it is connected to the knuckle.

How difficult is it to pull the axle out once the hub bearing assembly is out? According to the shop manual the knuckle seal needs to be pushed out and then do you just pull the axle out? It is only held by a snap ring at the differential housing? Won't I need to drain the fluid from the differential? The shop manual is not very clear on this issue.

Thanks
Leon