You are, as they say, THE MAN. Thought hotlinking was supposed to be turned off. Based on your observations, I went and downloaded my .htaccess file and found hotlinking to be protected. I removed the offending lines and whoila, it is fixed. I owe you a beer my friend!
I am having a problem with images not displaying from within WP after the upgrade to 2.8. I just get boxes with ?’s in them. If I click on the box and choose to view the image in another tab or new window, it views fine.
I have downgraded back to 2.7 and the problem remains and have now upgraded to 2.8.1 and still the problem remains. Anyone else having this issue?