Does PhotoStream send pictures encrypted over the Internet?
Yes, everything sent to or from iCloud is encrypted with SSL:

iCloud Security
iCloud secures your content by encrypting it when sent over the Internet, storing it in an encrypted format, and using secure tokens for authentication.
Encrypting content that is sent over the Internet
The following content is encrypted using SSL (Secure Sockets Layer) when sent over the Internet to or from iCloud:

Photos in your Photo Stream
Documents in the Cloud
Backup data for your iOS device

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