Bingo! - this is where i would suggest if you can lay eyes on one at a fish store or someone who has a setup do so. I think once you see it, it will all make sense. if i can find the photo i took of my tank setup i'll send it to you.
The live rock is the bio filter, no other form of bio filter is needed.You don't, technically, but all the filters and stuff to do the job adequately will be hanging off the side of your tank (or in your tank). Now as much of an engineer as i am, i would rather look at the inhabitants than filter equipment. You will need some sort of bio filter, heater and skimmer. Since those take up space, the best place to hide them is in a sump. I know there are filters (like Skilter[sp?]) that hang on the tank, and some all-in-one filters that sit inside the tank but i have no experience with them (Nor their cost...). i wait for the "Dollar a gallon" sales at the local chain pet shop to pick up 10 or 20g tanks for Quarantine and sumps.