If you have a home network with people who will click on every link they find, a software firewall is probably a good idea. While Microsoft has patched all known holes in its software, that is definitely not all of them. All it takes is one computer to be infected and start scanning for more computers. As all computers on your network are behind the NAT router, it will not prevent the rest from being infected. Windows XP's firewall will at least help stop this from happening. Anti-virus software can really only prevent viruses it knows about, a firewall doesn't care and will just block traffic that shouldn't be there.
NAT routers will prevent most, if not all, attacks from the 'Net, but as more families setup home networks they won't be enough. Instead of one computer in a house to infect, and then clean, there could be several. Wireless networks are more vulnerable here too as some bored kid down the street could hack into your network behind the router. The current wireless encryption protocols used in most home wireless routers is not very difficult to break and there are ready made tools to help with it.
The pop-ups can be annoying at first, but once the computer and firewall have been setup there shouldn't be any more unless a new program has been installed. Of course the ideal case is that we shouldn't have to waste time and money on stuff like this in the first place.
goates