Garry,
1. Assuming you mean a WEP (or WPA) key, this protects the wireless network, and yes anyone connecting to your wireless will need to have that key. Read
this thread for more wireless security tips.
2. You don't need to explicitly let anything in through the router firewall - unless you want to host a web/ftp server (not strictly allowed by most ISP's). Just ignore it.
3. Depends how paranoid you are
personally I have a software firewall on each PC as well as my router firewall. If someone gets through the router they still haven't got in to the computers and also most software firewalls will prevent or alert you to new outgoing connections. If you're running XP SP2, the Windows firewall should be fine.