Whether you want to install LILO to the root directory or to the MBR depends on your scenario. If you don't format and reinstall Windows often, installing LILO to the MBR would take care of things in the most simplistic way. It would add an option to boot Windows and Linux, and would present these choices when you turn on your computer.
However, if you are the kind of person who reinstalls Windows often, you would be better off installing LILO to the root directory and using the NT bootloader to present the choices instead. The steps aren't too complicated.
1. After you've installed Linux, choose to install LILO to the root directory / and create a boot diskette.
2. Boot into Linux using the boot floppy.
3. At the prompt, type: "dd if=/dev/hda2 of=/bootsect.lnx bs=512 count=1" where hda2 is the linux partition
4. Format a floppy disk using: "mkfs -t msdos /dev/fd0"
5. Copy the image to the floppy using: "mcopy /bootsect.lnx a:"
6. Reboot into Windows, copy the bootsect.lnx file to your C:\ and add this line to your boot.ini file: C:\BOOTSECT.LNX="Linux"
By the way, if you don't want to use floppies, you could always upload the bootsect.lnx file to some web space and download it when you boot into Windows.
As you can see, the 2nd method is a little more complicated, but it's ideal if you reinstall XP often. All you have to do is keep a backup of the bootsect.lnx file and add it to boot.ini after you reinstall Windows.
If you installed LILO to the MBR, and reinstalled Windows, the NT bootloader would overwrite LILO, and your only option would be to boot from a floppy and reinstall LILO. That's outlined in more detail in this post:
http://www.ntfs.org/forum/showthread.php?postid=328940#post328940
Hope that cleared things up