2) Can you fit free wheeling hubs and will the standard hubs fit? As in Sierra or earlier model (1994) Vitara. > as GeckoXL7 said yes you can.
As many people know, if you get them off a vitara, get those bolts with cone washers

I made the conversion recently, cutting gaskets from scratch even. If you don't break bolts (like I did) it-s a straight bolt-on procedure.
For sierras, you need coily sierra hubs. The leafy ones won't fit from what I'm told.
As for the 4x4 system to engage, the front diff with air actuator expects all 4 wheels and all the shafts to rotate at the same speed. If you have manual hubs not engaged, your front shafts and diff won't be rotating at all, causing havoc on your transmission if you switch to 4wd on your T-case.
GeckoXL7, that might explain your noise but somehow I would have expected it to happen on the front ? just my .02