You don't need to add permissions to delete stuff that's already included under the modify.
Then Folder1 and SubFolder can't be deleted, everything else can (Or should do I'll test it quickly)
I have something fairly similar configured, which I've basically got setup as follows:
Students - Read & Execute (This Folder Only)
(Which means that the root folder is essentially read only as far as the students are concerned. They can't create/modify/delete anything at the root level.)
Students - Read, Write & Execute (Subfolders only)
(The idea being that the teacher creates a (sub)folder [IE: English Assignment], which the students then have permissions to save/write to as needed.
NOTE: They can write INTO the folder, but they can't actually modify/delete the folder itself, which is basically what you want, right?)
Creator Owner - Modify
(Students can modify/delete their OWN files, but not the files of any other users)
I'm not sure how well that meshes with what you're actually trying to achieve, but it might at least help set you on the right path ...
Bingo!! Thanks steve. This is all on test folders anyway. Ive just tried it and it seems to work. Ill test it properly now and then I will make the changes to a script which will hopefully automate this folder creation.