The right way to protect your computer
First, remember, note everything on the internet can be trusted (http://spywarewarrior.com/rogue_anti-spyware.htm) many programs actually cause just as much trouble as they claim to prevent so you should make sure that whatever you get comes from a trustworthy source.
A few people (and many who will probably flame me for saying this), are religiously devoted to firefox and claim that using it will protect your computer from alot of spyware. This is simply untrue (http://mywebpages.comcast.net/SupportCD/FirefoxMyths.html) There have been many myths spread about this browser. It is not a bad browser, but in reality it does not excel at anything. If you are to change browsers, I would recommend IE7beta which can be downloaded from the microsoft website (http://www.microsoft.com/windows/ie/default.mspx), or you can wait until october when it becomes a required security update. Another option is using other browsers such as Avant browser which is more of a shell that adds features and security to the basic IE browser (http://www.avantbrowser.com/). It is what I used until IE7 beta came out.
A firewall, as people have previously mentionned, is an important part of your system protection. For a software firewall, I just use the windows firewall that comes with XP, but I also have a router that acts like a hardware firewall. If you are not using a router with this capability, I would recommend getting a second firewall that is more robust and featureful than the standard windows firewall. Since I do not require another firewall, I have no recommendations for it, though reviews I have read highly recommend ZoneLab's Zone Alarm Personal Firewall (http://www.zonelabs.com/store/content/company/products/znalm/freeDownload.jsp?dc=12bms&ctry=US&lang=en)
Next is anti-virus, possibly the most important part of a security suite. There are many big names out there all battling for supremacy, and I personally don't know which one is the best right now, but I do know that they are expensive and that there are free alternatives. Avast (www.avast.com) and AVG (www.grisoft) offer free personal virus protection suites. Should you suspect infetion that they do not discover, there are alternative scanners that can be used that do not provide the real-time protection that you get from your main program. The ones I recommend are from trend micro, and those are TrendMicro's HouseCall (http://housecall.trendmicro.com/) which is an online scanner or their offline scanner sysclean (http://www.trendmicro.com/download/pattern-dcs.asp).
Next, one of the biggest threats to security, spyware. There are many spyware applications, and more expensive is not necessarily better (in fact in many cases it is worse.) I personally run several spyware scanners because their scans are complimentary rather than redundant, no one application gets everything. I use Windows Defender (http://www.microsoft.com/athome/security/spyware/software/default.mspx), the new microsoft anti-spyware application. I also use Spybot S&D (http://www.safer-networking.org/en/home/index.html) which is possibly one of the best anti-spyware applications, not just because of its scanner, but also the other tools it provides. And finally, I use Ad-Aware SE Personal (http://www.safer-networking.org/en/home/index.html).
There are many other tools that can help your computer, though they are not required to protect your computer, they can help in certain situations. HijackThis (http://www.download.com/HijackThis/3000-8022_4-10379544.html) is a program that scanns for programs that access the internet. Remember, this is for experts only, if you do use this, make sure you don't do anything without googleing each item to find out what it is first. Sysinternals (http://www.sysinternals.com/index.html) offer many programs that can help people to diagnose problems. I use their tools constantly when searcing for and diagnosing problems on my, or my friends PCs.
For more information on security in windows Xp, try reading (http://mywebpages.comcast.net/SupportCD/SecureXP.html) which will tell you pretty much mostly the same things I did, but go into more detail and with explainations.