.Htaccess = No Thumbnails

My htaccess file is causing thumbnails not to show up properly.

I am using a fresh re-install of wordpress 3.1 upgraded to 3.31
It either doesn't display logo at top left OR no thunmbnails.

I also have a fresh from scratch install that has no problems

Htaccess causes no thumbs to show. No Htaccess lets them show but I lose logo.

Here is my current .htaccess

This only happens with certain themes (elegant themes)...What gives?

RewriteEngine On
RewriteBase /

#uploaded files
RewriteRule ^(.*/)?files/$ index.php [L]
RewriteCond %{REQUEST_URI} !.*wp-content/plugins.*
RewriteRule ^(.*/)?files/(.*) wp-includes/ms-files.php?file=$2 [L]
RewriteRule ^(.*/)?avatar/(.*) wp-content/avatar.php?file=$2 [L]
RewriteRule ^(.*/)?sitemap.xml wp-content/sitemap.php [L]

# add a trailing slash to /wp-admin
RewriteCond %{REQUEST_URI} ^.*/wp-admin$
RewriteRule ^(.+)$ $1/ [R=301,L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule . - [L]
RewriteRule  ^([_0-9a-zA-Z-]+/)?(wp-.*) $2 [L]
RewriteRule  ^([_0-9a-zA-Z-]+/)?(.*\.php)$ $2 [L]
RewriteRule . index.php [L]

<IfModule mod_security.c>
<Files async-upload.php>
##SecFilterEngine Off
##SecFilterScanPost Off

Is there an example htacess I should have or some server setting. I am using PSek Hosting (Incsub) basic install, I didn't touch a thing. I had the same problem before upgrading to 3.31