Yes you are being numb!
It won't drive normally because the diff in the transfer box is working, so because there is no drive connection to the wheels from the front propshaft, the prop is just spinning.
Now if diff lock is engaged, then the transfer box is locked up and is not allowed to work, so instead of just spinning the front prop, half of the drive goes to the rear prop and drives the back axle.
It's the front end that's knackered, but before you start pulling diffs out, remove the axle caps and see if the drive shaft is spinning in the ends, (they do go knackered) then pull the drive shafts out and check the other end (diff end)
MY money is on the drive shaft/end cap/s on the front axle.