Generally the side of the prop with the marking goes forward. This is the curved surface.

You'll have to enlarge the center of the prop with a reamer. You could use a drill bit but then there is the risk of getting the hole off center or angld and creating balance problems. Your local hobby shop should have standard and metric prop reamers.

http://www3.towerhobbies.com/cgi-bin...&I=LXK248&P=ML

http://www3.towerhobbies.com/cgi-bin...&I=LXEGH6&P=ML

The APC electric props also include a bushing to reduce the size of the large stepped portion of the hole. The prop should have instructions and diagrams showing how to select and install the correct bushing.

You are correct on the installation order. First the prop, then the prop washer then the nut.

The smaller shaft you see is the actual motor shaft that supports everything. It can be used for different mounting configurations using a collet type prop adapter. The instructions with the motor should show all of this. Read them thoroughly. If it has poor instructions, take a look at these from an Electrifly motor:

http://manuals.hobbico.com/gpm/gpmg4670-4725-manual.pdf

I don't mean this in a bad way but it sounds like you don't have a lot of RC experience. What plane will the motor be going into? Be very careful. You can easily get your throttle reversed and have an electric motor start unexpectedly. They'll slice fingers just like a glow engine. It is also easy to get motor wires switched, causing it to run backward. If this happens with the prop on, the plane could take off backward and do some damage. Get everything working without the prop first.

Do you belong to a local club? If so, great. If not, give it some thought. Not only will it provide a good place to fly, there is bound to be an experienced electric pilot who'd be more than happy to help out with your set up.

Good luck and have fun. This hobby can be very addicting.