Being the poor man that I am, I often have to pick and choose which modifications are most needed, instead of being able to do them all at once. I have an 02 XE. Which would be a better investment to install first- K&N air charger kit or a new exhaust system? I am leaning towards exhaust. Any thoughts?

Well just remember I/H/E all compliment each other. You won't get the full potential of each until all 3 are installed. But, if I was you I would get the exhaust and grab a $40 K&N drop in filter. That way you can do both at the same time. You will see little or no difference between the drop in and the full intake trust me.

I think that is what I am going to do. I am a new Xterra owner, and really this is the first vehicle that I have owned where I gave a crap. So I am new at figuring out what modifications are the best. So far I have started with new A/T tires and Bilstein shocks. Both needed to be replaced. Now I am looking at improving performance. I have ran into a few K&N honks that swear by those air chargers. But I think you are right in that I should just get the $40 filter.

Question: As I said above, I am a new owner and am new at the car acronyms. What is I/H/E? I'm guessing I is intake and E is exhaust. But what is H?

H = Header (Exhaust manifold)

I kind of thought that the "H" was for heads. However I don't know that the Xterra aftermarket has a set of heads available so I guess that H would stand for header even though headers are part of the exhaust system.
I agree with everything said above, first because your truck is an '02, (170hp) the exhaust would be a good start. The exhaust on the '03 is credited with the 10hp improvement over the '02. So there is a little room to grow.
Second, most everyone here says that the drop-in panel filter works just as well as the "intake systems" that are offered. Or at least that it is the best bang for the buck.
Finally, don't expect a rocket ship for $600 bucks worth of upgrades. The Xterra is a no thrills, off-road truck, and it behaves like a truck. The first Gen rigs are hard cases for getting extra horsepower from aftermarket mods.
Enjoy your new truck.