How should I set up my pictures with iCloud?

I am so confused with Photo Stream and my pictures.
Basically before the iPhone, I had all my pictures all my computer. 
Got the iPhone and synced it through iTunes.  This made two folders in my iPhone under Albums.  A PHOTO LIBRARY folder and a My Pictures folder, exactly the same pictures. 
QUESTION 1- Why did it do this and how can I fix it?  Is it really taking up double space on my phone.
Then I got into the PhotoStream thing. I enabled it on my phone and download the Control Panel.  Stupid iCloud makes you have two different folders for Uploads and Downloads on your computer.  So I did it, and its working fine.
QUESTION 2- Is there a way to just have ONE folder with pictures for PhotoStream?  I like the idea of Photostream and wireless sharing.
QUESTION 3- Lastly, I had an issue with Uploads not working on PhotoStream, so I changed some permissions on the Upload and Download folder and uninstalled and reinstalled the Control Panel.  Now the pictures that download onto my computer from my phone, have a LOCK symbol next to them and I can't edit them with any pic-editing program.  It gives a "This photo can't be saved because there is a problem with the photo file's properties" .. What is going on?
I know I'm asking for a lot but please HELP!

Question 1: You have to have both folders.  The reason is because the actual photos you synced to your phone from your computer are all in Photo Library.  The My Pictures album only contains links to the pictures in Photo Library, not duplicate pictures.  If you synced multiple folders to your phone they would all appear on your phone as separate albums, and Photo Library would contain the combined pictures from all these albums.
Question 2: No, you have to have a separat upload and download folder using Photo Stream with Windows.
Question 3: Sorry, don't know what's going on there.  You might need to reinstall the iCloud control panel for Windows but I'm not sure.

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