If Blago is indicted, can he still appoint Obama's replacement (even if said replacement is himself)? It appears he can. And, judging from the evidence, he could just be crazy enough to try. That said, the Capitol Fax blog--which is a pretty great resource, if you're trying to stay on top of this story--reports that Emil Jones is going to call the State Senate back into session to try to pass legislation setting up a special election to fill Obama's seat. My guess is that even with today's news, a Democrat would win that special election, given Obama's coattails in Illinois, but it's not as safe a Democratic seat as it seemed to be, oh, 8 hours ago.
P.S. Assuming he's not Candidate 5, doesn't a special election most benefit Jesse Jackson Junior? He's got great name recognition, which would help in a truncated campaign, plus he put a lot of high-profile distance between himself and his dad over the last few months, which should help him down state, where, in the past, the Jackson name hasn't been seen as a plus.