Normally when you start your computer and boot into windows a whole bunch of programs that you may or may not be aware of are running. Services and drivers are loaded for various reasons. Safe Mode, in simple terms allows you to start Windows XP with only required components running.
Why boot in safe mode?
There could be many reasons. If Windows XP is having trouble with something you've installed and you can no longer boot into Windows normally then chances are you can boot into Safe Mode and fix the problem. One of the biggest reasons that you'd want to boot into safe mode is to remove spyware or viruses. It is best to remove a virus or spyware when the files are not loaded into memory.
How to start in safe mode
Just after your computer has finished the initial boot-up (memory test, drive setups, etc) and before the Windows logo appears hit F8 (I usually start tapping it right after the hard drives are detected). A menu will appear and give you the option to start the computer in Safe Mode. In some cases you may also want to boot into Safe Mode with Networking if you need to access other network resources or the internet.
Now that you've made it into Safe Mode you may want to take a look at some other articles such as Spyware Removal
and Repairing a Windows Hosts File