A diff drop is HELL!!
I have one and it was the biggest PITA to install on your own. It would have been ok if I had someone to help me with some bits.
Basically what it does is fix your CV angles so you don't break CVs and tear boots all the time. Without it you can only go to a maximum of a 2" lift. With it you can get it up to around 3-3.5". I would never go above 3" though.
To explain it in pics, the CV angles look like this after a 2" lift:
You can see how extreme the angles are, this puts a lot of pressure on the joints and the boots. I split a boot within the first hour of wheeling after my lift because I didn't do a diff drop (my boots were pretty crap anyway).
After the diff drop your angles will look something like this:
That is my car with a 2" lift, the angles are perfect now.
The diff drop is done by dropping the front axle down about 40-50mm. If you are handy with a welder you can do this yourself by doing this with your diff brackets:
Or you can buy them from the US for around $400AUD shipped.
In doing this you will need to modify your X-member as it will hit the drive shaft if you don't. This will require grinding out a gap and welding plate along the bottom to reinforce it - Not very difficult, especially considering you are a welder!
You will then need to do a BJ flip (easy) and cut down the bumpstops on the upper A-arm (also easy).
This whole procedure will take you a good couple of days depending on how handy you are. It took me ages the first time but I think I could now do it in about 8-9 hours.
For the rear you can get some dobinsons coils (3"), some long travel shocks and brake line extensions and that should sort out height and plenty of articulation.
One all this is done you can easily fit 33" tyres and it'll be a weapon off-road.
I have a 2.5" lift on mine and 33's and I'm really happy with it. I'm going to bring the back up to a 3" and wind the front up to a 2.75". The only reason I haven't already is because I haven't had my brake lines done yet so I couldn't fit a 3" coil in.
My advice would be to keep it at a 2" lift with 33's and simply fit front diff spacers like they show here:
http://forum.australia4wd.com/index.php ... ntry119802
That will drop the diff 1" and give you very reasonable angles for a 2" lift and it's far easier than doing what I did! Oh and it's only about $30!
A 2" lift and 33's will look something like my one:
I saw you are in Perth so if you need a hand installing some of this stuff (for a carton) or if you want to buy a set of 2" coils off me ($110, bought for $185 about 4-5months ago, mint condition) PM me and I'd be happy to help you out.
Cheers
Harry