According to the documentation, the ImagesPaths property should be able to take relative paths like with the ~ sign as substitute for the current webapplication. In my WSS-only environment the ~ sign does not work (produces a 'NOT FOUND' in the Image Library). Relative paths starting with '/' do work OK.
Check - I just found a reply from George to some other article stating the same, that was mentioned above: http://www.telerik.com/community/forums/thread/b311D-bcmeak.aspx#501486
. The '~' just does not work under MOSS (or WSS for that matter).
One extra tip: in case the MOSS or WSS Picture Library's name contains space characters, do not
replace that with %20 in the config file 'ImagesPaths' property, just use spaces. In my case I have a 'Site Pics' Picture Library and the ImagesPaths property looks like the following:
Using the %20 for a space character produces the 'NOT FOUND' string in the Image Manager.