OK, I'll try and take these as directly as I can. Suffice it to say that you've touched on some complex and subtle issues and a little more research will do you well. I wrote up a basic primer (
here) that I'm not pimping so much for the process itself as the number of links to other resources. In particular, John Palmer's
How to Brew is indispensable. The first edition is online, but showing its age. Do yourself a favor and buy the book, now in the third edition.
Should I expect the beer to continue to get better as it sits in the bottles?
This will depend to some extent on the beer, but most average gravity (~5% ABV) beers will be best after something like a month or two in the bottles. The darker/heavier the beer, the more time it can handle.
Is the creamy head (unusual for most pub ales hereabouts) a result of bottle conditioning?
Not necessarily, but I'm assuming you used the ingredients that came with the kit. Those generally include 5 oz (~142 g) of priming sugar, which is a little more than I like for the average ale. A carbonation calculator (
like this one) can help you figure out exactly how much you need.
What is this "off taste" I have been warned about from using extract?
Don't worry about it. There was a time when it was difficult to get high quality, fresh extract. That time was the 1970s. Anything you buy from a reputable retailer will be top-notch.
If I need to top off after racking, do I have to boil and cool some water, or can I just use bottled water?
I would recommend adding the water immediately before pitching the yeast, rather than after fermentation. Ideally, you want to pre-boil and cool the water. Even freeze it a couple days ahead of time, since it will help you chill your wort before pitching, which you want to do a few degrees below your fermentation temperature. (That means getting the wort down to about 64°F for most ales, and keeping it there.) Bottled water is *probably* fine, but to be absolutely sure you aren't introducing contaminants, you need to boil it.
This is fun - already! And my wife is interested in helping now, and as soon as her training period at work is over and she's working regular-like, she wants to brew, too!
Sounds like you have a keeper. I can't count how many brewers I know who brew to "get away from the wife".