This drop-down list controls from which photograph the diffuse texture is derived from. Surfaces typically appear on multiple photographs and so there is a question of which photo should be used to photo-texture that element. The default setting for this control is “-by quality-“ and this means that the photograph on which this Surface appears with the highest quality setting (see Photo Properties) will be used for texture extraction. This is typically the easiest setting to use and provides most of the flexibility to get the desired result.
In some cases you will want to specify a specific photograph for a particular Surface or set of Surfaces. This is accomplished by defining a photo-texture Material with the Photo list set to the number of the desired photograph. Using this manual override gives you the flexibility when the “by quality” setting will not give the required results.
Since the Material name is shown on various dialogs and on the main toolbar Material drop down selector, it is a good idea to assign an appropriate name to a single photo texture material, such as the source photo that you selected.