Where are image files stored for wallpaper?

/Macintosh HD/Library/Desktop Pictures

Your wallpaper can be stored anywhere. But, by default, The "Apple Images" are located in :Library/Desktop Pictures/, with the other default images (Nature, Plants, Black and White, ... etc.) located in :Library/User Pictures/

Any albums you have in iPhoto can be directly accessed from the Desktop Preference. If you click on the "+" at the bottom left of the panel, you can select any image folder, and add that to the choices of what images can be used for wallpaper. I prefer to create a folder in the <user>/Pictures folder (i.e. <user>/Pictures/Wallpaper) and put images there.

That's about it.

Ta