Hi. I installed smushit and used it on 2 different images. In both cases it changed the URL for the image media library in a manner where the image is now no longer found by the library. The image remains in the correct location however.
here is an example..
Notice that there is no longer a .com after chinapeeled. The image is now not viewable in the media library since the recorded URL is incorrect. If the .com is added after chinapeeled, then the image continues to reside there.
I am using BP 1.7 as well by the way.