Right I am with you now regarding your Q #5.
This option sets how you select an image when creating a listing.
1) If you select 'thumbnail' (miniature version of your actual image) you can select your previously uploaded images visually, it is like displaying the contents of an MS Windows folder as thumbnails
2) 'list' is like list in MS Windows, so you select previously uploaded images by looking at a list of filenames instead of miniature images.
3) 'Upload' will allow you to select and upload the image there and then from your PC or wherever you have it.
In my experience it is best to set this option to thumbnail. Upload your images in bulk, which is much quicker because you can upload many at one time and then when writing the listing you can easily select the ones you want visually.
An another advantage of uploading before writing a listing is if whilst uploading you have an internet hiccup you will not loose your work since you last saved it.
What do you mean by 1,2,3 some or all ?