I'd spend the money on a good trans. And rebuild the top end of the motor. The last thing you want is to spend $2000 on go-fast mods, and have the engine blow.
205K miles is up there, so make sure everything is up to snuff before you go modding.
Also, I dont think the Water to air IC is very viable...least I've never seen any car running them besides the Aussie 3.8 RWDs.