i've taken my xterra through alot of water and mud, resulting in the engine bay being somewhat of a mess.
is this mud going to affect the engine's wellbeing in the long run? i understand an engine can hydro-lock and can obviously be killed if submerged, but how about just a little mud here and there? i don't take it too deep into puddles but just enough for the fan to shred it all over the engine bay.
and if it is damaging, what is the best way of washing everything off?

Just wash it off with water.

ClaptoVaughn,
Yes, water works wonders. I'd also caution against any high pressure spray in the area of the distributor, sheesh, prolly any high pressure is a bad idea with all of those computer control doohickies around. One other thing to keep in mind is not to hose down the engine when it's hot, wait until it's cool.
A little mud here and there won't hurt anything. I've seen some people's engine bays and been amazed at how dirty they were. I'd suggest keeping the engine bay as clean as possible though as when leaks do develop, it's much easier to pinpoint a source on a clean engine than a dirty one.
Bogatyr

Searching for "engine" in the subject field in the Appearance section:

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That should do it,
Brent