In older versions of iPhoto, I kept a folder called Favorites with all of my favorite pictures in it. When I updated to iPhoto4, I rated all of my favorite photos and created a Smart Album called Favorites. Today I noticed that my favorite pictures are no longer set to my desktop background, so I went to System Preferences, clicked on "Desktop & Screen Saver," and clicked on the Favorites iPhoto album.
I noticed, however, that the option to change the picture every XX minutes is grayed out. Although I could pick a single picture from that folder for my background, I was not able to select the entire album like I could with older versions of iPhoto.
I did some checking and found that this only effects smart albums. So if you use iPhoto to create albums of desktop images, like I do, you may want to keep a regular album around for that purpose.
[robg adds: I hope this bug gets fixed in a future system/iPhoto update, as I was also counting on smart albums to create a "live updating" folder of my current favorite images.]
Mac OS X Hints
http://hints.macworld.com/article.php?story=20040205114948502