The differential assembly utilizes a hypoid beveled ring and pinion gear set. It consists of a ring gear which is mounted to the differential case, a pinion gear which is mounted in the differential carrier, and a set of four gears mounted inside the differential case. Two of these gears are known as side gears and the other two are known as differential pinion gears. The right side gear is splined to the right drive axle shaft, and the left side gear is splined to the left inner axle shaft.

At the end of the left inner axle shaft is a flange which bolts to a similar flange at the differential-side joint of the left drive axle shaft. Because these shafts are splined to the differential side gears, the right drive axle and the left inner axle shaft rotate as their respective side gear rotates. The differential pinion gears are mounted on a pinion shaft and are free to rotate on it. The pinion shaft is fitted into bores in the differential case and is held in place by a roll pin. The differential case is mounted in the differential carrier where the pinion gear drives the ring gear, differential case, and its side and differential pinion gears.

When the transfer case is placed in 4WH or 4WL, engine torque is provided by the front propeller shaft. The propeller shaft is bolted to the pinion flange by a universal joint. The pinion gear turns the ring gear and differential case, which causes the side gears to rotate with the case. This action in turn causes the left inner axle shaft and the right drive axle shaft to rotate and drive the front wheels. When both wheels have equal traction, the differential pinion gears do not rotate on the pinion shaft. This is due to an input force which is equally divided between the side gears. In other words, the differential pinion gears revolve with the pinion shaft, but do not rotate around it. When the vehicle turns a corner, the outer drive axle must turn faster than the inner drive axle. When the inner drive axle turns slower than the outer, it slows its side gear. The differential pinion gears will roll around the slower drive axle side gear providing torque to the outer drive axle. When the transfer case is placed in 2WH or N, the front axle is disengaged and the front propeller shaft as well as all front axle components remain stationary while the front wheels are free to rotate.