Need help with fundamental understanding of voltages in this circuit
I think that what is happening is that with LED1 green you are effectively powering it from the base as the voltage at at the collector will be 1.7V due to LED2 and this is too low to power LED1. If the base voltage (IN1) is 5V then this is powering LED1 through the 10k resistor and Q1's base-emitter junction, the current through LED1 would be
(5-(0.7+3.2))/10000 = 0.11mA, hence a faint glow could be observed.

If LED1 is red(1.7V forward voltage) and LED2 is green (3.2V forward voltage) then when Q1 is ON the voltage across Q1 and LED1 will be (assuming Q1 is saturated) 0.2V + 1.7V =1.9V. This voltage will also be across LED2 (it is in parallel with Q1 and LED1) and since LED2 is green it requires 3.2V to turn it on therefore it will not light.

If however LED1 is green (3.2V forward voltage) and LED2 is red(1.7V forward voltage) then when Q1 is ON the voltage across Q1 and LED1 will be (again assuming Q1 is saturated) 0.2V + 3.2V =3.4V. This will be across LED2 and since it is much greater than the 1.2V it will turn LED2 On.