I occasionally take my Cherokee off road. It is stock, but when I ordered it in '96, I opted for the Up-Country Suspension Group which has everything I need for off-rad use: skid plates (sounds funny, I know), heavy duty shocks, 2 inches more ground clearance, and front and rear towing hooks.
I would say that towing hooks (especially in the front) and skid plates under the drive train and oil pan are a necessity, as it is better safe than sorry. Your XTerra proably has 10 inches of ground clearance, which is sufficient for most "tread lightly" type off-road use. But if you plan to go in the mud like a little (pop)kid, make sure you have all-terrain tires with good tread, or better yet, mud tires.
I am not really crazy about lift kits/suspension lifts or oversized tires. Not only do they make the vehicle more top-heavy and prone to rollover (especially when off-raoding in the hills), but the suspension mods may void your warranty, and even if your warranty is up, it is likely to give you suspension problems in the future. The bigger tires can also de-calibrate your speedometer.
I have never had any undercarriage or suspension damage on mine, possibly thanks to the Up Country system. I think similar upgrades will allow you plenty of fun.
Just don't harm the environment or the people in Free Your Mind will be after your ass.
~U2Alabama