the code in cvs is far from stable, and definately has issues like this. i do have this fixed and working on my local machine, but that code isn't ready to be checked in yet.
if memory serves, it may be a path issue w/ the images. i know in the code that i am working on, i've removed the hard coded news image path, and will just let the user specify whatever they want. then they can easily reuse any images they may have uploaded through the html module.
look through the code and find the "root" news image path that is being used, and add images using that path via the html module.
on a side note, you may really be better off just waiting for the 1.1 release which will have an offical news release that will address these issues.