I have read alot of references from the web about android storage for images. Most of them were saying Images are stored insided sd card same as photos that was taken with camera.
Does android allow us to store them in local memory in the android phone rather than sd cards?
You don't want to save pictures to your local memory. Some users only have a few MB of free application space - which would be killed by 1-2 pictures. I know my old G1 wouldn't accept call, texts, or any notifications when it was out of space - it becomes a paperweight. Maybe later versions are better.
The answer though, is yes. You can save the image to sqlite database which is local - not on SD card.