I've heard a lot of things spoken about the factory LSD, ranging from "they're trash" to "mine's awesome". Here's my take on them.
My previous (2001) XJ was open/open with the 231 transfer case. God bless its drowned soul, but the lack of anything in terms of traction enhancements in its drivetrain were, well, embarassing. Until you've ever had to sit there and watch FWD hatchbacks deal with wet grass better than your Jeep, you haven't lived.
Fast-forward to the current (2000) XJ, which, until recently, had the factory Trac-Loc.
DEAR GOD, WHAT A DIFFERENCE.
Granted, it's not a full locker by any means, but that sucker ploughed through things that the previous one could only hope to get stuck in. I ran it from 75,000 to 123,500 used miles, and it just worked. The only reason it was swapped out for a selectable locker was that I was doing an axle swap, and the Trac-Loc wouldn't carry over.
Is it the ultimate traction-enhancing device? No.
Is it better than an open axle? Damn straight.
Does it die ten minutes after it hits the pavement? No, but that depends on how it's treated. Lack of friction modifier, wrong weight of gear oil, idiots doing burnouts with it, etc. - all will contribute to its early demise.
Your call as to how you want to proceed, but I'd recommend going with it and seeing what it can do before sinking hard-earned cash into other options.