Okay, sorry it took me so long to post my results (BR, got the email, thanks)
The calipers did look a little sad, and since I was going to be 'all up in there' with the fluid and what not changing the lines, I figured what the heck - changed both front rubber lines and calipers.
As you can imagine the brakes are working VERY well now. No more dragging and decent stopping power (best you can get out of a Cherokee right?) Sorry I can't tell you definitively if the problem was the actual line or caliper
In regards to the BRAKE light being on, when I first surveyed the brakes the reservoir for the rear brakes was dry. Later I discovered the problem appeared to be from two slowly leaking pistons on the rear wheels (those were replaced with the pads).
When I put all new fluid in the lines I did it by bleeding out the brakes and adding new fluid until the fluid coming out of the bleeders was clean and new. I figured this would get rid of all the air in the system but the brake light stayed on. *Haynes* says this usually indicates one of two things: non functioning parking brake switch or problems with the proportioning valve (either air in the valve or a bad valve). The parking brake switched seemed to check out so I figured the proportioning valve.
Since I have no pin to push or pull on the valve I took it apart and the rubber seal inside seemed to be stuck. I figure this was keeping air in the valve. While putting it back together I figured out how to 'bleed' it (I'm not sure this is the technically correct thing to do, but it worked for me). This must have taken the air out of the valve because after that the brake light went off - sweet.
I am 'assuming' that the only reason the rear reservoir went dry was because of the leaky pistons on the drums. Of course I'll keep my eye on it to make sure this is the case.
So there we have it! all is well in Cherokee brakevile.
One last question: after installing the new calipers and rubber lines (I wanted stainless, but they only had them for lifted rigs at the local 4X4 shops) I was doing my test drive and I heard a horrible noise from the front right wheel on right turns. I found that the new line was rubbing on the rim during turns. I was able to push it away - back into the wheel well - and I haven't had the issue since. The old lines had metal (or composite?) casings right in the critical 'rub' area, but these new ones only have ... more rubber. Wondering what I should do to ensure the rubbing does not return.
Thanks for all the help!