hi,
If i save a image path in a database and retrieve the path for the file via php the image would be saved on the servers hdd??
Is this the case? Is this how all websites work usually
any assistance in understanding this scenario better would be really great!! 
A ‘path’ is exactly that; think of it as an address which POINTS TO the location that element resides.
This can be on the server Hard Drive, or on another server, or a ‘cloud’ service. In other words there is no direct answer to your question.
Here’s a simple example. I have attached an image to this post. It resides on the Sitepoint server(s).
The link is shown (below), which is the “address” to the image. That link is no different if the image was on any other server on the Internet.
Furthermore, I can embed the image in this post (via HTML) by simply referencing that link like this:
<a img src="http://www.sitepoint.com/forums/attachment.php?attachmentid=57474&d=1315918284" />
I hope this is helpful.