When a Series transfer box is in the two wheel drive setting, the front prop is not being driven by the gearbox. However it is still connected to the front wheels via the front differential. The front diff and prop will be rotated by the forward movement of the tyres.
The free wheeling hubs disconnect the front wheels from the front drive line. When the hubs are disengaged the front wheels will turn freely without turning the diff or propshaft. This saves wear on the front driveline parts and may slightly reduce fuel consumption. It is said that you have to do a lot of miles for any noticeable difference in fuel usage.