.nfo files and images

Just a quick question regarding .nfo files. I just started using XBMC last week and so far so good. All issues resolved mainly due to this forum. Just trying to learn how everything works (within reason).

I did some reading on the issue, but not confident if I understand this correctly.

I used Yanfoo to create nfo's and grab images. No problem. Imported them. No problem. Started to examine the .nfo code. Some problem. I noticed that there is a link to a website(s) for the images - but I have the actual images in my movie folder - confusing me a bit. Am I correct in thinking that XBMC will first look for the image in the folder and failing that refer to the .nfo file?

Thanks
C

If no one here can answer might want to move this question to another part of the forum, its not specific to ATV2, so many with answers will miss it in here.