I just upgraded from 31s to 33s KM2s two days ago. 3 speed auto here with 3.55s It gets me to work and back, completely drivable and goes 70mph no problem on the interstate. With 3.07s it'll still get you places and you're going to want to regear that much sooner. Go with new axles, people ask more $$ to regear than to rebuild an engine these days.
I grabbed an 8.8 with 4.10s from a junk yard, still looking for a d30 of a 4 banger with 4.11s. That'll be perfect with auto and 33s. Even with manual and 33s it'll work great. Your 5th will only be used on flats and 4th up hills.
As far as d35 goes, I've seen people wheel on 35s and beat on it then drive home.
Buddy beating on his YJ d35/35s:
I'm taking my chances as well with 33s next weekend. If I blow it up, 8.8 goes in that much sooner.