Is it possible to host attachments on an external site like photobucket?

short answer, yes; that's what they're made for...

So long as the photo site saves the uses attachments as a jpg, jpeg, gif, or png file you'll be able to just use the [img] tags to show those images on your forum.

thanks for getting back so soon. What I was wondering though is can I set up the attachment storage directory in the control panel to automatically store all uploaded attachments to an external directory or does is have to be one on the site where the forums are installed?

I have mine set on a sub forum to control band width.
But you will need open base and errrr external url enabled
in php 5

You can test this in the control pannel by clicking on
the test directory button.

Note :
When photobucket and alike hit high traffic your images
can go off line or become very slow in showing.

I'm not used to photo bucket,
but my members use it to host there own pictures anyway
and use that url to show them.

I don't think photobucket will work the way you want it too,
as i'm sure you have to log in etc..
But hey i may be wrong and you get it working.