Images can be inserted either by browsing for an existing image in the repository, or by uploading a new image in the repository. You can also insert images that are not in the repository, but available at some URL.
You can change the alignment of the images (using the usual text-align buttons), and change how the text flows around the image. This last option won't have effect in the PDF output.
Note that images are also documents in the repository, thus are versioned and such. If you have an updated version of an image you want to insert, it is recommend to NOT delete the existing image and upload the new image, but rather go to the document editor for that image (you can use the "Open image in new window" toolbar button for this), and upload the new version over there.
Currently it is hardcoded that images should have an "ImageData" part. They can however be of any document type.