The Spot skill is used primarily to detect characters or creatures who are hiding. Typically, your Spot check is opposed by the Hide check of the creature trying not to be seen. Sometimes a creature isn't intentionally hiding but is still difficult to see, so a successful Spot check is necessary to notice it.
A Spot check result higher than 20 generally lets you become aware of an invisible creature near you, though you can't actually see it.
Spot is also used to detect someone in disguise (see the Disguise skill), and to read lips when you can't hear or understand what someone is saying.
Spot checks may be called for to determine the distance at which an encounter begins. A penalty applies on such checks, depending on the distance between the two individuals or groups, and an additional penalty may apply if the character making the Spot check is distracted (not concentrating on being observant).
Read Lips: To understand what someone is saying by reading lips, you must be within 30 feet of the speaker, be able to see him or her speak, and understand the speaker's language. (This use of the skill is language-dependent.) The base DC is 15, but it increases for complex speech or an inarticulate speaker. You must maintain a line of sight to the lips being read.
If your Spot check succeeds, you can understand the general content of a minute's worth of speaking, but you usually still miss certain details. If the check fails by 4 or less, you can't read the speaker's lips. If the check fails by 5 or more, you draw some incorrect conclusion about the speech. The check is rolled secretly in this case, so that you don't know whether you succeeded or missed by 5.
Action: Varies. Every time you have a chance to spot something in a reactive manner you can make a Spot check without using an action. Trying to spot something you failed to see previously is a move action. To read lips, you must concentrate for a full minute before making a Spot check, and you can't perform any other action (other than moving at up to half speed) during this minute.
Try Again: Yes. You can try to spot something that you failed to see previously at no penalty. You can attempt to read lips once per minute.
Special: A fascinated creature takes a -4 penalty on Spot checks made as reactions.
If you have the Alertness feat, you get a +2 bonus on Spot checks.
A ranger gains a bonus on Spot checks when using this skill against a favored enemy.
An elf has a +2 racial bonus on Spot checks.
A half-elf has a +1 racial bonus on Spot checks.
The master of a hawk familiar gains a +3 bonus on Spot checks in daylight or other lighted areas.
The master of an owl familiar gains a +3 bonus on Spot checks in shadowy or other darkened areas.
The character can pinpoint the location of an invisible creature, or detect an illusion with a visual component.
A character can use Spot to notice the presence of an invisible creature. The relevant DCs are reprinted here. If the character beats the DC by 20 or more, he or she can pinpoint the location of the invisible creature, though it still maintains total concealment from the character (50% miss chance).
Defeat Illusion: The character can automatically detect any illusion with a visual component for what it truly is. No Will save is required, and the character doesn't have to interact with the illusion (but he or she must be able to see it).
Using Spot to Read Lips
Pronounce Unfamiliar Language: This use of the skill allows a character to repeat the speech of an observed creature, potentially allowing a comrade to translate the speech. It doesn't grant the character any ability to understand the language spoken.
Source: SRD 3.5 Combined Skills