First, I've read here that on the 3rd gens the front hardware (front shaft, etc) on a 4wd is still turning when on 2wd. If so, what exactly happens differently when switching into 4wd (transfer case change?)
Second, I've also read that we really don't have 4wd because only 1 of the front wheels is "driven" by the 4wd. If so, why does the frount housing have the little driveshafts going to both front wheels instead of having the dead side just setup like a standard 2wd (freewheeling hub)?

 

Yes, no front axle disconnect. Just like the old full time 4x4 pickups except with a part time transfer case.
The reason only 1 front wheel pulls is because the front axles are an "open" differential, meaning power is supplied to the wheel that has the least resistance. This is necessary because it is a steering axle. Know how the front end seems to "bind up" when turning sharply in 4wd? Would be much worse with a limited slip or locker. You can get an aftermarket locker for teh front axle, but it is limited in purpose and not intended for normal 4wd operation like slippery roads.

 

The transfer case powers the front end when 4wd is engaged. In 2wd the front axle and drive shaft are unpowered and just along for the ride.

We do have 4wd. If you don't believe me then just jack the whole truck off of the ground start it up, put it in 4x4 and let it go at idle speed....all 4 wheels spin. The front axle is an open style differential, so only 1 tire is guaranteed to spin....there is no freewheeling hub.

 

Has anyone tried the Spyntec hub kit?