Network monitoring software can be useful for a parent but in the wrong hands can be used for criminal activity.
There are many applications that are developed for packet caputuring and network sniffing. These applications are in production and are available for easy download like IMSniffer, Yahoo Chat Sniffer, EtherApe, TCPDump and many more.
These applications submit your network card into what is called "Promiscuious Mode" enabling it to view not only the packets that the network card was meant to recieve but any other traffic that is broadcasted throughout the local network (LAN). It is good to practice encrypting your chat if possible but most client software do not provide this option.