If you are just looking to set up a development server, then that should be fine.
As for your second question, I wouldn't bother setting up another instance, as there is no practical reason for doing so. Besides, when you set up another instance, another set of system databases will be created on the second instance. There is a master, pubs, northwind, tempdb, and msdb for each instance, and they cannot be used on any instance, other than that which they reside.
Thank you! The database will be developed on the environment described and then ported to a production server where there will be a web front end (developed in Dreamweaver in the development environment). Sound good?
Sounds good to me. Just take care when connecting development servers with production, as it can really cause some headaches. A lot of the places that I have worked for have development and production boxes on separate networks. It's not the best option for everyone, but you should have some security in place to keep accidents from happening. At the very least, make sure you have your backups on hand.