How exactly does an email with pasted-in images work?

I know that the images are not on the computer of the friend who sent them to me but what actually goes on when I open/view the email? Is it then that a message gets sent to the computer with the image telling it to connect me to it. And where does this message originate from and when? I've never understood this.

well if the person is the writer of the email then yes he uploaded the image. Now if it was forwarded thru chainmail then its sitting on the isp's server.