Inside an image tag you usually put the URL of the image that you want to show. More advanced parameters of (img) allow for resizing the displayed image so that it fits into the forum layout and is easier on people with lower resolutions.
Examples:
[img]http://www.website.com/image.jpg[/img]
[img width=640 height=300]http://www.website.com/image.jpg[/img]
For uploading images there's various free-to-use websites that'll do the job. I usually use imageshack.us myself, but taste varies a lot regarding adverts, time it stays uploaded, etc.
I'm pretty sure it's possible to do with attachments, but as I never use those, I can't help you there.