I suspect Tim is probably right (he frequently is :P ), but it's still worth checking a couple of other things to be sure:
1. Jack up a front road wheel and turn it by hand. You should see the front prop shaft rotate.
2. Try the same thing with the other front wheel.
If the prop shaft rotates for both tests then you have eliminated possible faults with the free-wheeling hubs (if fitted), half shafts and front diff.
The Series 3 Owners Club do a good deal on reconditioned gearboxes if it comes to that - I'm sure they could sort you out if you only need a transfer box and not a gearbox.
Having said that, the transfer box is relatively simple and easy to open up and work on. If you are happy taking a head off an engine, then you are probably capable of tackling a transfer box given the book of instructions.
Good luck - don't forget to come back and tell us what it was when you've fixed it so we can all learn from your experience.
James - ex Series 3 owner who wants to get another!
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Discovery - Katie
http://www.ejames.co.uk