Well, as usual I am wading into a discussion rather late, but here goes.
The original post seemed to me to be asking three questions:
1) Is free will an illusion?
2) How can punishment for original sin be just?
3) How can a good God allow evil to exist?
To these three questions I would add a fourth, from the intrepid Moonbeam:
4) How can grace be grace if there is a stipulation that requires faith?
I will respond in similar order
1) Is free will an illusion?
I think
free will may be an illusion, depending on how one defines free. I think most people define "free" as the power to do whatever I decide. If that were the definition, then I would conclude that freedom does not exist. But we do have freedom to operate within the confines of our nature, and in this sense God is totally free. What he does, He does without any outer constraint or confinement. No outside force can stop Him; He is totally inwardly driven. In psychological terms, He is self-actualized. But this does not mean that God can do anything, for He cannot sin, nor can He do that which is intrinsically self-contradictory for Him. Hence freedom is the power to operate without outside factors. Hence, few humans attain true freedom. We rarely make a totally "self-actualized choice." Whether we are consciously aware of it or not, most of our "choices" are more the result of introjects from heredity, genetics, environment, pre-cognitive memories, etc., etc.
That does not mean that freedom is an illusion. It means that freedom is something that God possesses and we no longer do. But there was a man who was free, because he was God: Jesus of Nazareth. Jesus was the only truly free man this world has ever seen.
Now for the more philosophical side of the question: "How can I be free to do what I will do tomorrow if God already knows what I will do?"
Texmaster has a point: we really can?t answer the question since we have no way to determine what ?knowing everything? is like. But that is no fun; we need to guess and explore

Still, I think our difficulty in this area is not so difficult as it may appear. I have used the analogy before:
My wife and I have a three-year old son. Let?s say that he and my wife are out in the front yard one day and my son starts to head into the street. My wife says, ?Son, I?ve told you many times not to play in the street. If you go into the street, I am going to have to take you inside.? Now my son looks back over his shoulder and flashes his most mischievous grin. At that moment, with perfect foreknowledge, my wife knows that he is going into the street. She knows it because she knows my son so well. So, does my wife run over and snatch him up and take him in before he actually disobeys? Of course not. Though she knows very well what he will do, the important thing is the volitional act itself. It is this volitional act that is what my wife most treasures, and it is this volitional act that reveals to my son his obedience or disobedience. The volition is the key issue, not the foreknowledge. Besides, one can see from this simplistic analogy that foreknowledge and volition are by no means opposed.
What did my wife?s foreknowledge have to do with my son?s choice? She knew perfectly what he would do before he would do it. Yet in no way did that intimate knowledge of his choice mar or predetermine the choice itself. My wife had perfect foreknowledge and my son had unhindered volition. There is no contradiction. That God knows what you will do tomorrow has more to do with his ability to dissociate from time and his innate knowledge of you than it has anything to do with violating your will.
2) How can punishment for original sin be just?
God is not punishing us for ?original sin.? I am not entirely sure what each person means when they use that phrase. It is a loaded term with a wide range of meaning to different people. It has to carefully be defined to be properly discussed. Move away from legal thinking and move more into considering the image of God within. We are a spiritually diseased race. God is not punishing us for what two humans and a reptile reportedly did however many eons ago. The story of Eden is the story of how spiritual disease ensnared humanity in a spell and introduced malignancy into our spiritual condition. We struggle with the concept because we are so individualistic: we see ?Adam? as distinct from us. Yet this is an illusion. All of humanity is connected. Your individuality is more like the individuality of a single leaf on a tree. You are an individual, but you share a common life. If disease enters the root, it spreads through the whole tree. This is not ?punishment,? it is a fact of the nature of the tree. If that seems unfair, look at the whole picture and realize that this ?common life? also works to our advantage. Because the Word became Human in Jesus of Nazareth, eternal, divine life (the cure for our disease) has also entered the tree of humanity. The same principle by which humanity is corrupted is the principle by which it is saved. That the Word became flesh benefits the whole tree, just as ?Adam?s sin? defiled it. God is not punishing anyone for another?s choice. God is asking us to take responsibility for our own diseased condition, to accept His diagnosis honestly and with courage, and to submit to the Cure.
3) How can a good God allow evil to exist?
Define good and evil. The Scriptures have a different concept of evil than most people have today. In Isaiah 45:7, God is said to be the source of both good and evil. Although there is tension between good and evil throughout the Bible, there is no true dualism. In a moral sense, there is only one absolute Good, that is God. Only God exists beyond any concept of change or time. All other rational creatures are only relatively good or relatively evil. They are good if they maintain their proper relation to the Good. Evil is motion away from that. ?Satan? is not the opposite of God, for there can be no opposite of God. Satan is the creature that has moved the farthest away from the Good. But all that makes Satan so destructively evil is good in and of itself: power, beauty, intelligence, subtlety, influence, etc.
Now come back to the question: ?How can a good God allow evil to exist?? Go back to the image of God. Only God is beyond change, yet God is also said to be love. The highest desire of love is to share itself. Hence it is God?s nature to create, and to seek to share His love with creatures whom, after their own fashion and kind, can reciprocate. This reciprocation would be most advanced in creatures that were most like God. But the creatures are not God. By nature they are subject to change. Still, in some fashion, love exists in humanity, and I would presume in angels. We may know little about love, but we know that love cannot be forced. It is not an issue of power; it is an issue of non-contradiction. It is not within love?s nature to be forced. God?s omnipotence does
not mean the power to do anything that one can imagine. The better taught theologians have always understood this. Omnipotence means the power to do what is non-contradictory. It is the power to do what is intrinsically possible. To say that God could force rational creatures to love each other and Him is a contradiction. It is not a power issue; it is a logical absurdity. God cannot give creature the ability to love and at the same time force them to love, because love by nature is unforced. Those creatures that bear the image of God (which, in part at least, is the ability to love) are by their own intrinsic nature very perilous.
Yet it is love?s nature to be shared. To ask why evil exists is really to ask, ?Why did God create such a perilous world?? Yet there is no other world that a God a love would ever create. It is His nature. It is not as if God was caught in some Shakespearean quandary: ?To create or not create, that is the question.? God is Love. Therefore he creates. This is not the best of all possible worlds; it is the necessary world to eventually bring about the best of all possible worlds. Evil is not the opposite of Love (or ?Good?), for evil is not the opposite of God. Evil is the absence of Love. It is intrinsic to love itself that those with the capacity to love cannot be forced to abide in it.
4) How can grace be grace if there is a stipulation that requires faith?
The essence of faith is trust. Trust is not a ?stipulation,? it the foundation upon which any real relationship can grow. God sheds His grace to all people, without favoritism. Does sunlight show favoritism as to which mirror it is reflected in? Trust is the ?Windex? that allows our smeared and blighted mirrors to be returned to their original shine. If I trust a doctor, I take his advice. Does a loving doctor dispense advice with favoritism? Still, we are but reflectors. The light does not generate from within us, it is reflected in us by nature.
Grace shows no favoritism, though to a dull mirror like myself it often looks that way. None of us is all that clean yet. We see but through a glass darkly.