Go to where you have your website files on your computer. If they're not all in one place, you should create a folder and put everything together.
Within that folder (or your Projects folder), create a new folder and call it images (or img). Put all your site's photos into it. You should also have folders for your CSS and JS (if needed).
When using Projects, the Editor will upload all necessary files for you and let you know if it can't find something.
Your files should look something like this; the main project/site folder with your html pages, form files and sub-folders for images,etc. :