As an afterthought...
The previous post was written assuming you were using a HTTP server, and using a URI like: http://localhost/file.html

The file:/// paths should work fine if you open the HTML file directly from the hard-drive, like: file:///C:/webroot/file.html
The security risk I was talking about doesn't apply to files opened in this manner. (As far I as I know, at least.)

Are you trying to do this locally on the computer? as in trying to view the image or
Are you trying to view this page on a web server?

What i do is in the folder where all the HTML files are, i have another folder called "images" with all the site images in there.

Then i would go into dreamweaver (which is what i use to edit my site) and then map to the image. If you have it working properly, you shouldn't need any of the C:\Users etc

If you need help with this, i can help you. I can do it for you if you would like.

Great, expertotech, I'm glad you got it fixed in IE8!

(by the way, i create webpage using notepad, but im planning to learn dreamweaver soon)

to everyone, my point of doing the img code locally is to check how it looks like while editing it before uploading it to the http server as im using notepad to create a page ...

As an afterthought...
The previous post was written assuming you were using a HTTP server, and using a URI like: http://localhost/file.html

The file:/// paths should work fine if you open the HTML file directly from the hard-drive, like: file:///C:/webroot/file.html
The security risk I was talking about doesn't apply to files opened in this manner. (As far I as I know, at least.)