You don't have to have it machined ... but you certainly should. After 260,000 miles the cylinders probably aren't fully round any more, the head and/or block surfaces may have warped slightly, etc. Stuffing new rings into oval-shaped holes is a cheap rebuild, but won't produce optimal results.
Ideally, you should send the block to a shop to be boiled out (hot tanked). They should rebore the cylinders to the smallest over-bore that will produce round holes, and check the top of the block for flatness. They should also remove the old cam bearings and press in new ones, and check the crankshaft journals for roundness. If any are out of round or scored, they can machine the crank, or you can buy a more complete kit that includes a remanufactured crank with bearings to match.
The head surface should also be checked for flatness, and resurfaced if not flat. Valve seats should be reground, and valve guides checked for excessive wear. If worn, they can be drilled out and sleeved, or if not too bad the existing holes can be knurled.
Rebuilding an engine right can cost $1000 or more. Even a budget rebuild is probably good for at least $600 to $750. It might be cheaper if you don't want to make a major investment in an old Jeep to just find a complete engine out of a vehicle in a junk yard. All 4.0s are essentially the same inside, so you can take an engine from an XJ, YJ, ZJ, TJ or WJ.
