That is a bit of a strange one, as if everything is released the hub should go into 3rd. In 3rd gear the outer gear ring turns 4 inner gears, which in turn engage the axle. I would guess the spring is broken or weak and no longer is pushing the driver (a cross shaped piece that slides on the axle) down to the face of the outer gear ring.
http://www.users.globalnet.co.uk/~ha...samaintind.htm