Yes the 'Upload Image' uploads from your pc to my server so you dont have to use photobucket or imgur etc. The 'Img" button is for images from external sites.
The 'Upload Image' button is also the same thing as the 'Upload Attachment' tab you see below when making a post. It is just a simplified step to upload images here.
Also the 'Img' button restricts image width to 800 px in width so It does not go outside the boundaries of the forum post area. If its wider than that the you only see the link with the tags.
Using the 'Upload Image' creates thumbnail and if you click on the image it opens up fullsize into a litebox.