Add an image into HTML content in VSys, whether copy/paste or loading it externally, causes VSys to copy that image into its "image pool". This is a hidden file of images (you can't edit it) that have been embedded anywhere in the HTML that VSys saves.
VSys will usually resize an image that's very large: embedding a 20 megapixel image into a letter isn't actually helpful; VSys will immediately resize it down to something reasonable.
When sending an e-mail, VSys embeds the images directly into the e-mail.
Showing content in VSys Live, VSys Live just references the internal images.
If you add the exact same image into VSys in more than one place (where "exact" means the file is 100% identical internally, not "looks like" or "same image, different size"), VSys re-uses the existing image instead of making a new copy. This means that the same image, for example a logo, that's embedded into hundreds of letters is only really stored in VSys once.
How do I add images?
When editing a letter template, click on Insert image on the left-hand side. This brings up a dialog where you can add an image from your hard drive.
Copy/paste from Word or other text editor: if the content in your text editor has an image, when you paste that in, VSys will try to load that image.
Copy/paste from a browser: if the content in your browser has an image embedded in the text, VSys will try to load that image from its original source and embed it in the text you paste.