You're having a problem with the encryption. What type are you using? WAP or WEP?
Is the key correct in the wireless properties of the device attached to your computer? I ask because if it isn't, Windows will give you the error you just gave me.
Yes, others can connect to your wireless network, if it is unprotected. As of now, it is officially unprotected. Do you live in a residentual neighborhood? If so, encryption is a must. If you live in the suburbs- not needed as much (because the houses are further apart, and set farther from the street- chances of someone connecting to your network are unlikely) I would go through the process of setting up the encryption again- use WEP. I believe WAP is supposed to be more secure, but WEP is ok to use- it's what I use, and I do everything on my computer! One more thing- have you changed the default password for the admin account on your router? If not, do it now
Note: Use WEP encryption with an Open key