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The easiest way is to use Image Manager. You first set up categories through system admin/images, and give appropriate permissions and assign image size limits in the category.
Users just click on "Manager" in the submit news dialogue, and they can upload images (if permissions granted to say "registered users" for example)
Adding images yourself can be done easily using the "imgsrc" link to an existing file on your server.
If you do a search using "Spaw" or "wysiwg" as your keywords, some hacks have been introduced using this editor, I think they just might have an "image upload" facility