There are two ways, one is to make the image part of the tiddlywiki html file, which can slow down loading if there are too many. If you are always going to have access to the local file system (either on the same computer or through some service like dropbox) you can link to a local copy of the image.
Either way you need a local copy of the image.
To embed the image in your wiki you can either drag the file from a file browser into your wiki, or use the import function of tiddlywiki by clicking on the import button and then selecting the image file you want to include using the file browser.
To display the import button to controlpanel -> Apperance tab -> Toolbars tab -> Page Toolbar tab and then check the box next to the paperclip icon, the import icon should appear in the sidebar next to the home and save buttons.
Once you have imported the image like this it is a tiddler and is part of your wiki.
To embed a local image in your wiki it is easiest to use the _canonical_uri field. You put the image either in the same folder as your wiki or in a sub folder (I use a folder called images), then, assuming you are using a folder called images located in the same folder as your wiki, you make a new tiddler and give it a field called _canonical_uri and in that field put ./images/(imagename)
Where you replace (imagename) with the name of the image you want to display, complete with file extension. When you have done that the tiddler should display the image and it can be transcluded or displayed using the [img []] syntax or the image widget.
There is
some more about this here. There should be two tiddlers open, one talking about images added to the wiki and one talking about local (external) images.