I completely understand that that is a pain, but I can't figure out what is causing the problem.
Is it breaking when you upgrade the plugin straight from inside of your Plugins list in your Admin? Are you running a Windows server?
Unfortunately, I don't see any extra folders when I unzip it, and can't reproduce the problem.
As to losing PhotoSmash data, uninstalling and deleting the plugin does not delete any of your images or the information in your database. When you reinstall, it will all be there (unless something other than PhotoSmash did something nasty). It will not change any of your settings or database entries.
In fact, it is proper plugin etiquette to provide a clean-up routine that would remove the database tables and remove the entries in wp_options if a person wants to completely remove all traces of a plugin, but I haven't gotten around to that. I certainly need to.
Byron