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Your router "firewalls" the LAN side (your computers) by masking them from WAN (outside computers) identification. I'm pretty sure your router does this by dropping unauthorized pings and giving each of your computer an IP address only it knows. This should be on by default but you may have to turn in on.
A router doesn't substitute for a full firewall, however, whether it is software of hardware. A real firewall also monitors outbound trafic so trojans and other programs can't contact the WAN side (or even other stations on the LAN side for that matter) without explicit permission.
The router is a good first defense but doesn't replace a software firewall--one should really use both. A hardware firewall--where a physical box seperates your computer from the scary outside world--is the optimum defence.
Anyway, I think I got this mostly right. Hopefully a network guru will fix my mistakes and set you straight but this will get you rolling.
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