Ok, real quick. The new media manager (WP 3.5) may default to different options. I've used it inserted images with it and made sure the link was to the media file. LBP works like normal.
Newest version of ColorBox should correct old jQuery compatibility issues, though it also doesn't seem to play nice with LBP right now.
Unfortunately I have influenza right now and am not capable of much. I am trying to get a release out by Monday though which I think will solve a number of issue. Not sure if that's going to happen though because of the flu.
All that said I haven't forgotten about all this.
Also @tzdk thanks for all the extra troubleshooting for everyone.