The picture of what you're making should tell you which number is wrong, because obviously one of them is!
When you go from one color to another, hold the yarn that you're not using anymore over to the left and bring the new color up from under the old one when you start knitting with it. This will automatically twist the stitches and prevent holes.
Amy's video on intarsia shows the method, as well.
As for the ends of the cast on, I guess you'll have to weave them in.