iPhoto doesn't support Photo Library. How would Image Capture be able to read and import the pictures if they're on the cloud? And, Photostream would reduce the quality of the pictures - not something I want.
If I upgraded, would I be able to step back down?
The photos are on the cloud but also on the device, and assuming you choose to keep the originals on the device, iPhoto or image capture will see just that.
I do believe photo stream sends original quality of pictures though...