First of all:
WJJeeps.com - Jeep Grand Cherokee WJ 1999-2004 - great resource: hours of reading.
The WJs can be made very capable off-road as fundmentally they are nearly the same as every other Jeep...same axles, transfer case, steering, suspension, etc.
Up front you get a Dana 30 in all models and out back you get a Dana 35 with the I6 and the Dana 44A with the V8. SelectTrac 4WD gives you the same NV242 transfer case as you would get in an XJ. This is the preferred TC for off-road use, but the alternative (NV247) is not bad either...it just gives you fewer options and no fully-locked high-range mode. The NV247 came with QuadraTracII and QuadraDrive 4WD systems, the difference being the QT2 has open diffs front/rear and the QD has VariLok diffs front/rear. The Varilok diff works just like the NV247 transfer case - a gerotor-driven hydraulically-actuated clutch pack. As one wheel slips, it generates pressure and progressively locks the clutches and transfers torque side to side. Variloks work pretty well up to around a 32" tire. After that, the clutches in them are not able to transfer torque as well.
The V8 model is usually preferred in here...most debates about one over the other bring up points like the 545RFE transmission and D44a axle you get with the V8 which are much more robust than the 42RE and D35 combo. Also, the fuel mileage is similar between the two (sometimes people report BETTER with the V8) and the V8 has proven to be a reliable motor. Both motors have their own specific issues...just be sure to keep up on fluid changes as needed and use synthetic in the V8 to avoid sludging.
The Laredo models usually have fewer options, cloth seats, plastic/unpainted body cladding, and SelecTrac. They can be had with an I6 or a V8, but the V8s are rare. Leather is an option, as are painted bumpers. This is probably the best place to start for a wheeling rig.
The Limited models usually have most of options as standard equipment, have leather, have either QT2 or QD, and (at least in my area) are usually v8s. There's a V8 High Output option as well (270hp).
The Overland has pretty much every option as standard equipment, the 4.7HO standard, QuadraDrive standard, skid plates/tow hooks standard, and may have UpCountry suspension with a 20mm lift. This is also a good place to start and by swapping in the NV242 transfer case you get what we call "SelecDrive" giving you the best axles AND best transfer case. I went this route because of all the goodies you get right out-of-the-box plus the fact that I'm staying pretty mild with mine.
Blend Door issues are a failure in the HVAC system giving you only cold air. They can be fixed the hard and expensive way (remove whole dash) or by cutting the HVAC box behind the glovebox area and replacing just the broken components. It used to be the "ghetto" way to fix it to some, but it is very easy, very inexpensive, and Mopar even offers a kit now to do it this way. There are also aftermarket fixes that are a little higher quality and a little higher price. People always bring this up as a reason to avoid the WJ, or to avoid the Limited/Overland models, but it's really not a big deal anymore...just a little inconvenient when it goes.
One thing I think will turn you off to the WJs is there's a bit less aftermarket support than for the XJ and components overall are more expensive. The wheel wells are pretty small so it takes a lot of lift and trimming to run even 32s. While I know some people will disagree, I think the WJ is not intended for the very difficult trails...like anything else, you can build it for that, but building it for moderate trails is about 20 times easier. Axle swaps aren't as easy due to the somewhat different rear suspension (upper A-arm) and steering linkage (which I hear is more similar to the JK than the ubiquitous XJ/ZJ/TJ/MJ/LJ steering). For a street/moderate trail rig though, I think it's hard to do any better than a WJ V8.