In other words posts, comments and labels are all stored on their Google servers whereas pictures are stored on mine.
This caused me a lot of grief as I had to change CNAME's and add sub-domains and I did not really understand it all but eventually after three days I figured it out despite not receiving any aid after repeatedly asking for help on Bloggers help area.
So there you go. I can carry on blogging now and hopefully Google or Blogger will never pull a stunt like this again. So annoying.