I recently got Kerio firewall (freeware version). My computer seems to be talking to itself, especially a program called svchost. Should I allow this to happen? I made a rule to deny it, and nothing's happened so far.

System:
Win XP SP2

Yeah, uh... you don't want to do that. SVCHOST is kind of necessary for your OS to function normally. In fact, you should expect to see mutliple instances of it running at a time. If you do a search for it, you'll find that it is a rather important process with helps you system handle DLLs. You might want to allow SVCHOST to run.