Will it stop malware from phoning home ? Yes ... However, most people will just click the allow button on the pop-up ...
The Windows firewall (XP SP2/3, Vista) + a hardware firewall is better than a good software firewall w/o a hardware firewall and a hell of a lot less annoying and intrusive ...
Ultimately, a good hardware firewall and a good software firewall would provide the best protection, but there's still some degree of hassle that goes along w/ a good software firewall that may not be worth it to the average joe.