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Blogger blogs by default use Picassa for storing photos, which offers 1GB storage for free. Is there a convenient way to expand the storage or use some other alternative to get more storage for photos?

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The easiest way, which still uses the Blogger interface for uploading, is to sign up for 2nd Google account, and give that account author (or even administrator) rights to your blog: this works for now because Google account storage limits are per account, not per flesh-and-blood person. It may have some downsides, though, if you want to be a verified author of your blog.

Another option is to host your photos on another service, and link to them via their URL. However photos hosted outside Picasa will not be used as the thumbnail for your posts.

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Well, not if you're looking for an easy upload from Blogger interface, but there are many free services that you can use, I recommend using SkyDrive or Flickr.

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