Which version of the editor do you have? I suggest that you take a look at the following article from the editor for MOSS help - http://www.telerik.com/help/aspnet-ajax/image_manager.html
In your scenario, you should set the images paths of the editor configuration to:
This should make it point to the pic library of the Subsite1 site. Notice that the path starts with a slash - this tells the editor that it should look for Subsite1 in the root of the site collection. If the path does not start with a slash, the editor will only look from the current site.
If you want the change to the ImagesPaths to be applied only to the site with the Wiki library, you need to create a separate configuration file for that site. For more information, see http://www.telerik.com/help/aspnet-ajax/different-configuration-files-for-different-webs.html
All the best,
the Telerik team
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