Yep, that's right. There are two options for photos - one is to upload as an attachment, which uses space on my server, and the other is to upload to an image hosting website like photobucket or village photos.
To do that second one, you just need to copy the URL for the image after you have uploaded it and use the 'Insert Image' button in the Post Message screen, then you paste the URL into the tags on the screen. When you click the Insert Image button, it puts special 'tags' into the text of your message which sort of look like this:
Then you just paste the URL for the image in between those tags like this:
and that comes out as an image in the finished post, like this: