Step 1. Keep your firewall turned on

A firewall helps protect your computer from hackers who might try to delete information, make your computer crash, or even steal personal information such as passwords or credit card numbers. You should make sure your firewall is always turned on.
If you're running Windows XP Service Pack 2 (SP2), Windows Firewall is turned on by default.

Step 2. Keep your operating system up-to-date

High priority updates are critical to the security and reliability of your computer. They offer the latest protection against malicious online activities. Microsoft provides new updates, as necessary, on the second Tuesday of the month.
Automatic Updates was turned on for you when you installed Windows XP SP2. The reminder bubble will reappear each time you start up your computer.

Step 3. Use updated antivirus software

Viruses and spyware are two kinds of usually malicious software that you need to protect your computer against. You need antivirus technology to help prevent viruses, and you need to keep it regularly updated.

Free online virus scan services can be found here . 

Step 4. Surf and download more safely

Spyware can be installed by Web sites, downloaded programs, or a program you might install from a CD-ROM or floppy disk. Spyware is most commonly installed through free software, such as file sharing programs, screen savers, or search toolbars.

DO NOT let your IE become like this one. 

NOTE:

Microsoft recommends all computer users upgrade to Windows XP SP2 to help improve the security of their computer while using the Internet. Service Pack 2 is available as a free upgrade for existing XP users. 

From here, you can find more tips and guidelines for how to use your security software and how to recognize and act on threats.