Collar worn out, how bad is it??

[Izlu]

While having transfer case torn apart few days to weld a small crack I noticed that the output shaft collar is worn out pretty badly, both inside and outside. Can someone tell looking at the pics below what could cause this and how bad it is? Should I replace it?

Thanks

 

[birdmann]

Your in that deep. Might as well replace it. Would you swap a clutch without replacing the throw out bearing? I wouldn't.