@rain: I resized an image in Picnik, uploaded and inserted it to my test blog (with Duotone on), no complication whatsoever. But then again, the image was from my scanner/computer; maybe the ones you've used include some info that isn't wiped out by Picnik like it would be if edited in Photoshop. Could you give me the link to where you got the Kermit pic from?
Another thing: I noticed in the source code of your pages that the insertion option wasn't always the same - one of the images was "large", another one "fullsize" and so on. In Monotone these have no effect; maybe it's not the same with Duotone, so I'll have to experiment and see if these make any difference.
@devblog: see here for the background to the story (with which I suppose you're familiar). The latest complication is that a width qs now shows up in the source code even when you delete it in the html editor (except in flexible-width themes). What's worse, the number isn't the actual width of the inserted image but the supposedly maximum for the theme you're using (which again is often wrong, as I've shown in this post).
I sent a ticket re this two weeks ago, and got this reply:
"This is intentional. If there is a problem with image quality, please send us a copy of the original images as an attachment and also send us the URL where you are using the image on your site."
I sent them a link to a demonstration post I prepared, sent them the image, gave them extra details too, - and I'm still waiting for a reply. Starsquid also sent a ticket a on this couple of days after me, asked about it in the forum yesterday, and was told by staff that this query is on queue...