Most home network routers include a built-in hardware firewall that monitors and blocks inbound communications at the network level.
By comparison, a PC firewall can monitor and block both inbound and outbound communications at the PC level. For the most complete protection, a PC firewall should be installed on every computer on a network.
Now I must note here that the built in Windows XP firewall does only offer INBOUND protection. It will not prevent spyware from sending out your personal data, IF it gets on there in the first place. For that you would need to use a DIFFERENT firewall and disable the Windows firewall entirely. On a personal note, I use the Windows firewall only, have since I purchased the computer nearly two years ago. I use it in conjunction with SpywareBlaster, good anti-virus protection, good surfing habits, watching and knowing what I download. I have had no problems doing this at all. I have no spyware, malware, trojans or viruses so nothing is on my computer that can "send out" information either. It works for me but each person must make their own choices, you know where you and your family surf, do you download lots of music, are you gamers? If so, then I would recommend using one of the good free ones that PP notes in his post. But remember to disable the built in firewall if you choose to go this way. A computer should only have ONE firewall running on it...this doesn't count the firewall on the router....this just applies to the PC itself.
Combined, a router's firewall and a PC firewall provide multiple layers of protection that a router firewall couldn't provide by itself.
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