If you want to get rid of the t-case drop, you will more than likely need a SYE and CV drive shaft. Read here:
What is a CV shaft and why do I want one? - JeepForum.com
Since you have an LJ, you may
be able to get away without doing the above, but if you're going to offroad I highly recommend against that. I've seen too many bent output shafts and broken drive shafts to ever recommend sticking with the stock setup after lifting a Jeep.
Your shifting problems may just be from the t-case drop. Obviously running things that way isn't how it was originally intended to be run, so things are a bit off. Try pushing the t-case skid back up and see if it fixes your shifting issues.