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In a notebook, you can create a text cell by first positioning your mouse just above a cell and then shift-clicking. A palette will appear that includes a button on the right that will let you insert a link to an image.

You can also add some html code in the text cell by clicking on the "html" button in the palette.

If you prefer to work in a command cell, you can type:

html('')

to display an image.

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fixed formatting and expanded answer

In a notebook, you can create a text cell by first positioning your mouse just above a cell and then shift-clicking. A palette will appear that includes a button on the right that will let you insert a link to an image.

You can also add some html code in the text cell by clicking on the "html" button in the palette.

If you prefer to work in a command cell, you can type:

html('')

html('<img src="http://your.website.here.com/image.png">')

to display an image.

Another option is to upload the image using the "data" menu in the notebook. You can then do something like the following.

import Image
im=Image.open(DATA+'filename.png')
im.save('example.png')

This uses some python to display the image. You can also do various filters, rotations, etc. to the image using the Image class.