As said above. Underwater exhaust is just fine for the most part.
A small amount of water splashing onto your engine is alright in limited amounts. You air filter is NOT for filtering WATER from the AIR. It is for filtering dirt from the air. Water going INTO your intake is never a good thing, and even in limited amounts can lead to engine failure.
You are the best person to justify the cost of a snorkel setup. Are you really seeing enough water for that? Or are you just splish splashing around in it? You must be cautious either way, but my best guess is you don't need one.
On the 4.2L bit... 1997 and 1998 were BAD years for the 4.2L. The 4.2L in itself is such a sorry replacement for the 300 Inline.
I would feel very nervous wheeling a stock '97 4.2L, as even under normal driving conditions they rarely reach 100k without rebuilds. If you have the cash and really enjoy your sport, then I would run the 4.2L til it dies and replace with a 4.6l from a wrecked donor truck. I would not under any circumstance spend any money to "upgrade" the 4.2l