Images are 100% hosted, the script scrapes ANY url and builds a gallery based on your thumb settings. This allows for real-time tracking and image manipulation (on-site) cropping, deleting, rotation, etc. Videos can be sponsor hosted or served from your server.
You can tie sponsors to galleries during import and manipulate those ads or swap them out. The ad system in LM is extremely extensive and flexible.
Liquid Media has a huge list of features. I usually suggest people click-thru to vimeo and watch the HD admin demo full-screen.
http://vimeo.com/2807089?pg=embed&sec=2807089
click play, then watch it full screen. This is a demo of 1.0, but will give you some indication what to expect.