Front Diff - Mud / Water

It could definately be a possibility. I've got the same problem with my rancher and I am replacing all 3 seals on my diff (one for each axle and one for the pinion gear). I hope this will solve my water issues.

Repieces, let me know if that works. How involved is it to change all of the seals?

The two seals for the axles (one on each side of the diff) are pretty easy to take out. As for the seal that goes near the pinion gear, I don't know. I've never done it before, but I'll be back home next Wednesday and that's when I'm going to try and replace it.

Did replacing the seals fix the problem? Are you still getting water and mud in your front diff?

i would bet the seals need replacement. my 2001 450 had the same symptoms as yours and the seals fixxed the problem
also i noticed when the rear seal(drive shaft) was removed it looked new and intact while the the two side seals were worn,i only say this because the rear seal may not need replacing. noting the sive of tire and lift kit would only increase the chance of seal/bearing failure. one more thought you said you have play that should not be, if you pull the axels out put new clips in there.