If you upload your pics with each auction then you do it the same way as before -- except that once they're uploaded you have to choose them from the main "pic library" that pops up. Click on the pictures you want and then hit the "Done" button.
At least I assume this way is new because I never had to do it before today.
As far as "external" if you're talking about the option of using external hosting that means you'd have to upload them to some other server. That just allows for the possibility of still having pics in the event that Auctiva's image servers go wonky.
If I'm not explaining well or if I have something wrong, someone please let me know.