When the feed opens and makes the image request, Google dynamically renders the image on the fly. This has to be done this way in order to be able to control the Advertiser's budget. In other words, if I have a budget of $100 – when I use that budget up, another set of advertisements must be rendered for the very next person that opens the feed.
The one curious item is the selection of Blogger or Movable Type. Why have any constraints to a specific platform? Are there constraints? It seems this technology could extend to any RSS-enabled site. As for Google, there's not too much information available on their site.
I'm looking forward to signing up for Adsense for Feeds when it's available. If you've got any additional information – please provide some feedback in the comments.