Aside from the always ongoing image issues that pop up with Blogger most of the time, it seems that in trying to solve one bug, they have introduced another. Just speaking from what I'm seeing.
The Bug
When Blogger introduced the ability to upload a header image directly from the Layouts screen it was a good deal. Makes something that is relatively confusing easy to do. But there has always been a problem with header images uploaded this way when using a Custom Domain and it relates to some of the issues involved with using Picasa Web Albums as the image host for Blogger.
To try and make a long story short, Picasa Web Albums restricts images over 800px in size from displaying on outside domains, EXCEPT apparently blogspot.com is allowed through. PWA defines different images sizes/features by the folder in which images are accessed from (a bit more on that from an earlier post). So when you use the layouts feature to upload a header image, the code generated is using the full original size folder for that image (even if the image is less than 800px). Since this is blocked on outside domains, folks using the custom domain in Blogger and using this feature would find their header images disappearing (To confuse matters more, if it was in the persons browser cache already it would show for a bit, but to everyone else it was no go).
The Fix
So after all this time Blogger finally caught on, and seem to have put in a new folder that can be accessed from outside domains, and now the image header will upload to that directory. Here's an example url.
http://3.bp.blogspot.com/_KFUscpI6LaQ/R0-ljp6nQBI/
AAAAAAAAAkU/SIm-MYc35us/s1600-R/hamster2.jpg
The key part is the s1600-R folder, which is the new one. Previously the folder used was s1600. So the new -R folder apparently is only used by Blogger for the headers, and doesn't suffer the domain restrictions, so it should solve the problem for header images for custom domains. If someone has a problem with one previously uploaded, just reload it and it will use the new folder.
The New Bug
Well, that's all fine and dandy, but now images uploaded to the post editor for posts are using that same s1600-R folder for the large/linked size. Which is incorrect, and due to other oddities of the PWA setup will prompt for a download when accessed like that, instead of showing the image full size. Here's an example.
Click on the hamster and you'll be prompted to download the image.
If you look at the code produced, the linked image again is going to the s1600-R folder. Previously, linked images that should be displayed went to the s1600-h folder. This is all part of the convoluted ways that PWA restricts access to their images. The -h folder is supposed to show a webpage with the image embedded. And that is what was previously used for the large size posted images.
I assume this is system wide, and not a fluke with my account as I'm seeing it other places. At some point I also assume they will correct this.
Update
This is now marked as a Known Issue with a "workaround".
Corrected Image Code
