What it amounts to is that the image file needs to be *found* by the web page, either by means of a direct and complete (and *regular* path), or by means of a so-called "relative" path.
Let's say that your web page is placed inside
C:\Documents and Settings\you\My Documents\ Web\ page.html
If the image is in the same folder, e.g.:
C:\Documents and Settings\you\My Documents\ Web\ test.jpg
then all you need *is*
If the image is placed in a subfolder, like
C:\Documents and Settings\ you\ My Documents\ Web\ images\ test.jpg
then all you need is
However, if the image is placed someplace else, like
E:\ Pictures\ test.jpg
then what you need to do is
This ONLY works if you open the web page as a file on your own computer, browsing for an HTML file using the File | Open menu.
And before people start yelling "that doesn't work!"... I just created a web page on my own system, did exactly this, and it works.
When opening a web page on an actual web server, the image MUST be inside the actual web root (regardless of the subfolder it's in).
So if the web root is, for example, E:\ web\ www\, then the image must be placed in that folder or one of its subfolders. A web page called on a web server has no access to files outside the defined web *site* - but again, if you simply open an HTML file with a double-click (or browse to it using File | Open), this restriction does not apply.
Also keep in mind that the HTML file and the image must be located on one computer (which includes locations on network shares.)