Camera Roll / Wallpaper
This is where the iPhone stores the pictures taken with the camera. You can drag images into this folder and they will be prepared for use as wallpaper. They will be converted to JPEG format and a thumbnail will be produced. You can then easily select them as wallpaper right from the phone! One small drawback: you will have images in your camera roll, so iPhoto will prepare to import them whenever you connect your phone to your computer.