Ouch...you have some rust issues. I almost lost half the skin on my nose and one side of my face helping a buddy re-weld a skid plate he knocked off his TJ. Was welding skid plate on and touched a rust spot on the frame that had some salt and sand and other crap hidden under a flake of rust, and it exploded in my face. Only wearing cutting goggles, not a shield. My bad. If you want to run the risk, you could try re-welding, but you'd be better off just replacing the muffler and pipe in between. A decent muffler shop will do it for a couple hundred bucks (including new cat-back muffler). Good luck.

Edit: You might want to look at some rubberized spray paint for some of the rusting components under there (bolts for mounting the shocks, etc). I am just getting ready to touch mine up and I've had that stuff on there for about 2 years and it has held up fairly well. Tough to get through if you're changing out shocks or doing other work, but it seems to do the trick.