It certainly is pointing to a blown front diff.

Try Scenario 3 again. But look to see if the front driveshaft turns. If it does that rules out transfer case problems and nails the front diff as the problem, especially if the front axles DON'T turn.

1998 Sportage - Gone.
2004 Honda Civic Coupe.
2007 Suzuki Grand Vitara - She got it.