I'd never use distilled water (see: http://www.homebrewtalk.com/wiki/index.php/Water
). Go for spring water or regular filtered tap water.
I think you can add the extract at any point. It's already been heated in the process of making it. I'd some at the beginning and the bulk with 15 minutes to go in the boil, however, just to ensure it is sanitized. Follow the hop schedule; you'll just be adding them to thinner wort at the beginning.