Between the settings for image locations and the names of header files, I ran into a strange problem.

The file /functions/bfa_rotating_header_images.php has a test for whether the directory stored as $imgpath can be opened. If it fails, it throws the error "the folder permission or path to your header image folder is incorrect."

Even when the header image is visible, the error message still showed. When I tweaked the settings to make the error message go away, the image returned "not found."

To make the image appear, I had the relative location at wp-content, the images directory set to blogs.dir/xxx/files/wherever, and the image set to logo.png or background.png.

I ended up just commenting out the line in the php file that showed the error, though that's obviously not the best solution.

so you created something like
blogs.dir
site1 site2 site3
files files files

did you try this way
site1 site2 site3
header header header

I did try that, without success.

But more importantly, that would require manual intervention for every blog in our multi-site installation that uses (or may use in the future) Atahualpa. And it would be a directory inaccessible to the WordPress back-end -- I'd have to create directories and move logos into them through the filesystem.

Unless I'm missing something.

I'm having a similar problem sorting out the path of my logo image now that I have upgraded to 3.7.12.

I've noted the new sections in ATO related to images and have tried to follow the logic but something was still not right.

I then noticed that I had a new .restored folder and I found my missing images in there and moving them back to atahualpa/images solved the problem.

Is this .restored folder a new feature WP 3.5.1?

did you make sure the file permissions were correct?
did you name the folder in the atahualpa theme options for the sites?

if you want to put the images in the 'blogs.dir\nn' folder just set the ato->Image Locations->images Directory to someting like 'blogs.dir/2/ata-images'

Make sure the ata-images' and 'ata-images/header' folders have a permission of 755 and the files in them have a permission of 644.

This worked for me.

EXAMPLE:

Edit the site (Network -> Sites -> Edit -> Settings ) and change the following parameters:

Upload Path wp-content/uploads
Fileupload Url http://www.mydomain.com/wp-content/uploads

P.S. Make sure the chmod is set for 777 on the uploads folder.

P.P.S. This will effect your image uploads for new pages, the old pages will still default to blogs.dir. But you can always go to the blogs.dir folder it is trying to upload to and change the chmod to 777.