Yea, a drop in K&N doesn't prohibit you from closing the stock air box correctly..
And yes I have had experience with intakes on diesels.....I had a K&N full intake on both my 6.4 and my 7.3, and quickly removed them, and replaced them with drop in K&N filters, and never worried about it....I also had a K&N on my dodge, and than replaced it with a AFE intake, and I also eventually replaced my K&N drop in on my 7.3 with an AFE, and then swapped that to a Ford AIS.
If your going to go with 35's you'll be fine....Driving around with 37"s and 3.73 is not such a good idea, its amazing how fast things will heat up, even just driving around town.