I've found very little written on this subject, so I thought I'd take the time to write what I have learned and hopefully raise some questions which can be addressed by people with more SEO experience than myself.

I run a very photo heavy travel blog. I have a photo which I post every day in addition to photography I use in the context of most of my articles. As a percentage of my total traffic, Google only accounts for about 14% of my incoming referral visits (according to Google Analytics). I never really thought much of it because I had nothing to compare it to. I had no idea if 14% was good or bad.  

I recently joined ProjectWonderful, which is an ad buying network where you can buy and sell ads (with money) on other sites in the system. As part of the network, you can get a glimpse of where other sites are getting their traffic from. I was astounded too see that photo blogs similar to mine were getting almost all of their traffic from Google Images. Various Google sites would account for 6-8 of the top 10 referring sites and provide often in the neighborhood of 500-2000 visits per day.

Despite the heavy use of photography and my attention to "alt" and "title" tags, I get ZERO traffic from Google Images.

I began snooping around and realized that the one thing all the other sites had in common was that they hosted their own images. I used Flickr. I made the decision to use Flickr because I thought that I would be saving bandwidth and storage costs and would get the social networking benefits of the site. Despite having over 200 "friends" on Flickr, and having my URL on every image I upload, and about 3,000 images, Flickr only delivers about 70 visits per month to my blog, which is less than half a percentage of my total traffic. An even tiny increase in Google Image traffic would dwarf my Flickr traffic.

I can't say that I fully understand how Google Image works. I do feel comfortable saying the following: 

• If you host an image on Flickr, it is possible to find links in Google Image which point to your site. However, they seem rare. (For example, I have a Flickr image which ranks 15th for "Easter Island Maoi" but it takes you to my Flickr Image, not my website.)
• Google Image seems to give more credibility to images hosted on the same domain as the text which surrounds it. I don't know if Flickr is penalized or if self-hosted images are given a bonus, but the effect is the same.
• If you search for any common term, you will probably not find any Flickr images near the top of the search. Even though Flickr is probably the largest single repository of photos on the web, they are almost never found near the top of searches. Try doing search yourself for terms such as "great pyramids," "statue of liberty" or anything common.
• Flickr does appear to get a bonus in Yahoo searches, but the benefit is dwarfed by not being listed in Google.

I've started the process of moving all my photos off Flickr and onto my own domain. I'm using Gallery2, an open source image hosting platform.  I'm still customizing the software so I can optimize each page and rename files so they are better recognized by Google. I'll keep images on Flickr for the social networking benefits, but I will point to images only hosted by myself.  

I hope to have some more data once my conversion is complete.