The Expando function only works if you pull the image from another website so you would copy the URL link such as http://www.yoursite.com and put that between the expando brackets. I don't have an upload feature that works with Expando but the add attachments works great and they will enlarge when you click on them. Best of both worlds!
When someone uses the URL method in a post, if they later move their online storage location, I guess the image will no longer appear here? I can see where a year from now there could be a lot of little red x's in posts where pics used to be.
I've uploaded pics directly into some posts, and I'm assuming that those are now stored here, and will be available as long as the site is up.