Ron & Deb,
Windows 7 is still pretty new. The 'library' is a new file structure just introduced in Windows 7. Technically, it is not the same as the old 'My Pictures' folder that you see on a computer running Windows XP.
The problem as you described it with the Picture Library is new to us; I checked with Support and they haven't run into it before. I tried to reproduce the problem on my office machine here which has Win 7. I got part way...the uploader in IE8 was having problems seeing JPEG images that are in the Pictures Library. I didn't see any ghost folders, but the uploader running in IE8 couldn't 'see' the my test images contained in the 'Pictures Library'.
However, it could see pictures loaded in a folder inside the documents folder. Those worked as normal.
I tried the uploader in Firefox (it is written in Java while the uploader in IE8 is written in Microsoft's ActiveX) and the library and its images worked just like it should.
So for now, I suggest you either a) move your pictures outside the Pictures library and see if that doesn't work, or, b) use the uploader Firefox to access the Picture Library.
We will take a look at the problem you reported and see if we can figure something out, but as I say, it is brand new, and not something we have an 'off the shelf' answer for.
Hope this helps.