METHOD: Click the add photo button. Instead of finding the image on my local machine cut/past the image URL into the dialog box.
Oh yes… for those who want to see the full album. It is here:
http://photos.imb.biz/models/shoot/elisabump
(Please not the album contains tasteful nudity)
Hmmm… well that method didn't work. It has copied the image from the website where I had it stored into Picasa. But at least I now know I don't have do download to my pc and re-upload!