I figured out the problem with my URL absolutifier HttpModule (which I'm calling "UrlAbsolutifierModule" - gasp). I was hooking into things too early in the request lifecycle, so when the Subtext RSS handler attached a GZip filter to compress the RSS feed it was GZipping things first, then I was trying to process URLs. Attaching later in the lifecycle allows me to wrap the GZip filter so I can do my processing before the contents get encoded.
If you're reading this site through RSS, pictures should now properly display. Here's a little picture of my cat so the RSS folks can see it in action - if you see the picture in your RSS reader, you've got the cleaned up feed:
If you don't see the picture in RSS, it's not working. Should that be the case, please leave me a comment to that effect.
I'll test this out for a while before I release it. If it works, I'll put it out there for folks to consume.