There are two layers, One shows a pattern for linking to the local file, the other shows the picture in the popup.
The example uses a picture named 'IMG_9822.JPG' The picture is located in the C:\Users\Public\Pictures folder on the computer.
I then added this to the <xsl:template match = "Field"> section in the <xsl:choose> part.
Here is a copy of the whole template for the show picture in popup.
<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform" xmlns:fo="http://www.w3.org/1999/XSL/Format" xmlns:msxsl="urn:schemas-microsoft-com:xslt">
<xsl:variable name="ignoreFieldNames" select="'|OBJECTID|Shape|Shape_Length|Shape_Area|ATTACHMENTID|REL_OBJECTID|CONTENT_TYPE|ATT_NAME|DATA_SIZE|DATA|'"/>
<xsl:variable name="headerRowColor" select="'#9CBCE2'"/>
<xsl:variable name="alternateRowColor" select="'#D4E4F3'"/>
<xsl:template match="/">
<html>
<head>
<meta http-equiv="content-type" content="text/html; charset=UTF-8"/>
</head>
<body style="margin:0px 0px 0px 0px;overflow:auto;background:#FFFFFF;">
<table style="font-family:Arial,Verdana,Times;font-size:12px;text-align:left;width:100%;border-collapse:collapse;padding:3px 3px 3px 3px">
<tr style="text-align:center;font-weight:bold;background:{$headerRowColor}">
<td>
<xsl:value-of select="FieldsDoc/Title" />
</td>
</tr>
<xsl:apply-templates select="FieldsDoc/Attachments" />
<tr>
<td>
<table style="font-family:Arial,Verdana,Times;font-size:12px;text-align:left;width:100%;border-spacing:0px; padding:3px 3px 3px 3px">
<xsl:choose>
<xsl:when test="FieldsDoc/Fields/Field/FieldName">
<xsl:apply-templates select="FieldsDoc/Fields/Field/FieldName[not(contains($ignoreFieldNames, concat(concat('|', text()), '|')))]/.." />
</xsl:when>
<xsl:otherwise>
<xsl:apply-templates select="FieldsDoc/Fields/Field" />
</xsl:otherwise>
</xsl:choose>
</table>
</td>
</tr>
</table>
</body>
</html>
</xsl:template>
<xsl:template match="Attachments">
<xsl:variable name="imageCount" select="count(Attachment/ContentType[contains(., 'image')])"/>
<xsl:variable name="attachmentCount" select="count(Attachment)"/>
<tr bgcolor="{$headerRowColor}">
<td>
<table style="font-family:Arial,Verdana,Times;font-size:12px;text-align:left;width:100%;border-spacing:0px; padding:3px 3px 3px 3px">
<xsl:variable name="imageSrc" select="Attachment/ContentType[contains(., 'image')]/../FilePath"/>
<xsl:if test="$imageSrc">
<tr align="center">
<td>
<a target="_blank" href="{$imageSrc}">
<img src="{$imageSrc}" width="275px" border="0"/>
</a>
</td>
</tr>
<tr align="center">
<td>
<xsl:value-of select="Attachment/ContentType[contains(., 'image')]/../Name" />
</td>
</tr>
</xsl:if>
<xsl:if test="($attachmentCount > $imageCount) or not($imageCount = 1)">
<tr align="center">
<td>
<table style="font-family:Arial,Verdana,Times;font-size:12px;text-align:left;width:100%;border-spacing:0px; padding:3px 3px 3px 3px">
<xsl:for-each select="Attachment[position() mod 2 = 1]">
<tr align="left" bgcolor="white">
<xsl:if test="(position() +1) mod 2">
<xsl:attribute name="bgcolor">
<xsl:value-of select="$alternateRowColor"/>
</xsl:attribute>
</xsl:if>
<td>
<a target="_blank">
<xsl:attribute name="href">
<xsl:value-of select="FilePath"/>
</xsl:attribute>
<xsl:value-of select="Name" />
</a>
</td>
<td>
<a target="_blank">
<xsl:attribute name="href">
<xsl:value-of select="following-sibling::Attachment/FilePath"/>
</xsl:attribute>
<xsl:value-of select="following-sibling::Attachment/Name" />
</a>
</td>
</tr>
</xsl:for-each>
</table>
</td>
</tr>
</xsl:if>
</table>
</td>
</tr>
</xsl:template>
<xsl:template match="Field">
<tr>
<xsl:if test="(position() +1) mod 2">
<xsl:attribute name="bgcolor">
<xsl:value-of select="$alternateRowColor"/>
</xsl:attribute>
</xsl:if>
<xsl:if test="FieldName">
<td>
<xsl:value-of select="FieldName"/>
</td>
</xsl:if>
<td>
<xsl:choose>
<xsl:when test="FieldValue[contains(., '.JPG')]">
<img target="_blank">
<xsl:attribute name="src">file:///C:/Users/Public/Pictures/<xsl:value-of select="FieldValue"/></xsl:attribute>
<xsl:attribute name="width">450 </xsl:attribute>
</img>
</xsl:when>
<xsl:when test="FieldValue[starts-with(., 'http:')]">
<a target="_blank">
<xsl:attribute name="href">
<xsl:value-of select="FieldValue"/>
</xsl:attribute>
<xsl:value-of select="FieldValue"/>
</a>
</xsl:when>
<xsl:when test="FieldValue[starts-with(., 'https:')]">
<a target="_blank">
<xsl:attribute name="href">
<xsl:value-of select="FieldValue"/>
</xsl:attribute>
<xsl:value-of select="FieldValue"/>
</a>
</xsl:when>
<xsl:when test="FieldValue[starts-with(., '\\')]">
<a target="_blank">
<xsl:attribute name="href">
<xsl:value-of select="FieldValue"/>
</xsl:attribute>
<xsl:value-of select="FieldValue"/>
</a>
</xsl:when>
<xsl:when test="FieldValue[starts-with(., '<img ')]">
<xsl:value-of select="FieldValue" disable-output-escaping="yes" />
</xsl:when>
<xsl:otherwise>
<xsl:value-of select="FieldValue"/>
</xsl:otherwise>
</xsl:choose>
</td>
</tr>
</xsl:template>
</xsl:stylesheet>
at line 117 you just need to set the path to the one that works for your case.
