Forward and backward movement is normal - CV joints can compress and extend slightly to accommodate movement in the suspension. The front driveshaft in the Liberty doesn't ever need to move as the transfer case and front differential are in fixed positions - but if you decide to pull the front driveshaft you'll be happy it can compress. That's how they come out.
The 1/4 rotation could be the CV joint at the transfer case end. When you were under your Jeep did you happen to look at the rear CV at the T-case end? I'd bet the boot is shot and so is the CV joint. Easy repair to replace the CV - about $80 shipped.
Do a search on replacing the CV joint on the front driveshaft - lots of threads with detailed instructions and pics.
Bob