The standard Google dialog for choosing a photo integrates with Picasa Web Albums. If you want to add a photo to your orkut scrapbook, you can select it from your computer, from the web or from Picasa Web Albums. When you upload photos from your computer, they're saved in an album called "Drop Box". For each Blogger blog, Google creates an album that stores the images uploaded to that blog.
That means we could expect to see other Google apps using the same model. Google Docs could have an album that contains all the images uploaded to your documents, spreadsheets and presentations. The Gmail album would include all your image attachments. This way, you wouldn't have to upload the same image multiple times and you could reuse in other Google sites.
It's unclear why Google doesn't provide in the dialog an option to search your images from Picasa Web Albums. You still have to know the location and the name of an image. Google could extend the photo picker to documents and other files, move Google Desktop online and provide a unified way of uploading, organizing and sharing your files.
6 hours ago