Restore CDs hold a image of hard drive at factory setting. It is XP + some utilty software PC maker install. The restore CD will restore the factory status, i.e. when you got it. It maybe "clean" XP or "clean"XP plus something. But it does not really matter.
You will lost everything on HDD, so make sure double backup everything important.
It is a good idea to disconnet other things such as printer when you do restore.
Install XP SP2 will make all security updates up to date. All PC mag (including PCA) new issue has it.
It will be generally safe if you have SP2 installed.
As for best Free Firewall, try Zonealarm click here.
Best free AVG: AVG Anti-Virus click here