I'd keep the 2.5 (Jeep was dominating the SCCA races with it back in the day) and swap in an AX-5 (goes right in place of the AX-4) and a 95+ Explorer 8.8 (with 4.10s and disk brakes). The 8.8 came with posi or open, so get an open if you want to throw in a locker. You most likely have a 3.55 geared rearend and that's absolutely killing your power. :(
After that I'd swap in a v8 ZJ front sway bar (bigger), firmer shocks (rather than stiffer springs) and look into the air-charged bumpstops. Oh, and I'd drop the engine driven fan for an electric.
Rust is so prevalent in my neck of the woods that I'd never ever voluntarily cut the bed.