RadEditor is an HTML editor and inserting an image requires the specific image to be publicly available (e.g. on a web server) so it can be seen from users viewing the page. That is why ViewPaths / UploadPaths / DeletePaths
properties should be set to web server's directories.
If a user wants to insert an image from their local machine, first she should upload the image to the server, if she has the appropriate permissions.
In addition, if your web application is running on the 2003 server IIS 6 platform you can use a Shared Drive for images and documents. Detailed information regarding this is available in the following KB article: Uploading images and files to a Shared Drive
the Telerik team