WordPress FAQ

In the admin, panel, go to Options -> Miscellaneous and select the option to Allow File Uploads. If you need help with changing permissions, the following from the wiki should help:

Allow File Uploads: Choose whether or not to allow users, including you to upload files using WordPress(So they can upload files to link to from their articles). If file uploads are allowed, the few options related to this in the same page are applicable.

How to set your paths / permissions:
Once you have allowed File Uploads, download this tiny file: [http://www.tamba2.org.uk/downloads/absolutepath.zip]

Unzip it, and upload the php file to your chosen uploads folder.

In your browser, go to your website http://www.example.com/youruploadsfolder/absolutepath.php

Copy the path address you will see. Note: You may need to add a trailling slash after it. Example: /home/.sites/90/site104/images would be /home/.sites/90/site104/images/

Click Uploads on the main screen (top right of the menu it is)

Enter the path address in the top box

Enter the web address to your uploads folder: http://www.example.com/youruploadsfolder in the second box.

Using ftp or your cpanel, CHMOD or change the file permissions on your uploads folder to 777 or 766 or 755

The uploads folder does not have to be in the same directory as WordPress

If you have trouble finding the absolute path, you can use the tool described here

Then check main menu across the top. Click Upload.

You may want to refer to the following two articles.
How to properly aligning the images.
How to create a drop-shadow effect, with alignment

Originally answered by Podz at the Forums