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Almost certaintly. Late model XJs aren't very tolerant of steeper driveline angles. You may be able to get away with a transfer case drop, but then you're giving up ground clearance.
I would definitely go with an SYE and new rear shaft, you will have horrible driveline vibrations especially on highway if you don't. I've got a 3.5" on mine now and it was bad before I got the AA SYE w/ Tom Woods shaft, now it rides smooth like stock all day long.
for a cheap way to get out of buying a $300 DS, you should be able to use a front shaft form some cherokees. im using the front from a 98, since i got the 8.25 out of it too.
You can swap the transfercase output yoke from a YJ onto a slightly longer junkyard ds until you save your $$$ for a SYE and dbl cardan jointed ds. The ears on the yoke have more clearance and decrease binding between the ds and yoke. We did this setup on a friends '88 after installing a 5.5" lift.