Win XP allows different users to access the same computer using truly unique user names and passwords. Different levels of access authority can be set, different desktops, menus, etc. As such each registered user has their own temporary internet files folder, history folder, cookies, temp folder etc., some of which are hidden unless you select "Show Hidden Files & Folders in View Options.
Many of the files and folders stored in the temp folder are from items that were downloaded off the interent, program installations that didn't complete, etc.
Personnaly I clean out my temp folder (C:\Documents & Settings\User Name\Local Settings|Temp) once or twice a week, by deleting all of the files and folders residing in or under it. I did this for years in Win 98 and have been doing it with my new XP system every since I got it a couple of months ago, without any problems.
The only time you might want to be careful about deleting your temp files is if you recently downloaded or installed a program. To be on the safe side I always suggest that in these cases a person reboot their system, and then make sure the program installed properly before deleting their temp files.
Hope this helps.