Actually, I'd advise you to check out mnpctech's tutorial on case painting. Its not as easy as it looks, and these guys know their stuff. You certainly don't have to be as elaborate as they are, but the basic techniques are solid.
In answer to your specific questions, you should take the case down to bare metal, and use a self etching primer. I use automotive paint for my mods, automotive primer works well. Specifically I achieved results similar to what the mnpc experts can do with rustoleum brand paint, which runs about 5 bucks a can at Walmart. The other brands mentioned in the tutorial are quite pricey and not available in my area, except in specialty paint stores.
In my experience if you just begin painting over the original paint, you aren't going to get the results you're after. You are going to get an orange peal, chipping and peeling mess. I tried, and failed.
I have a recent mod I am working on, I decided to paint the interior without primer. I ended up with a rough, paint spattered look that I found strangely appealing but it definitely wasn't what I was after. Regardless, its just the interior so I'm not too worried that my sister is going to open the case and closely examine the paint job!
The bottom line is, if you intend to paint a case it will really depend on how much effort you're willing to put in to do it properly.
I used spray paint on mine, and would definately say sand down where you can,
I didn't and in a few places I've knocked the paint off but in future I would definately spend the extra time on it
**Some nice stuff on that site Buzz, Thanks for the link **