Say for example in My Pictures\Dogs\ you have a color image named spike.jpg. You open up spike.jpg and convert the image to Black and White using Picasa and then close Picasa.  In this scenario Spike.jpg hasn't changed at all. If you use another photo editing application to view the photo it will appear unedited and in color.

If however you SAVE spike.jpg in Picasa after converting the image to Black and White the following happens.

1. Picasa creates a hidden folder named "Originals" in the directory containing the image to be saved. (My Pictures\dogs\Originals)
2. The original photo (spike.jpg) is moved to the Originals folder.
3. Picasa creates a new photo, combining spike.jpg and the black and white conversion, into a new file named spike.jpg and stores it in the same location as the previous photo (My Documents\Dogs\spike.jpg).
4. Once you have saved the edit, spike.jpg will appear black and white regardless of what application you use to view