This StackOverflow Question is a good one to start with when figuring out whether to store images in a DB or on a filesystem
http://stackoverflow.com/questions/3748/storing-images-in-db-yea-or-nay
I have also written about the issues on my blog
http://www.atalasoft.com/cs/blogs/loufranco/archive/2007/12/03/images-in-databases-part-i-what-to-store.aspx
http://www.atalasoft.com/cs/blogs/loufranco/archive/2007/12/04/images-in-databases-part-ii-web-images-are-random-access.aspx
http://www.atalasoft.com/cs/blogs/loufranco/archive/2009/04/28/document-storage-database-blobs-or-the-filesystem.aspx
The short answer is: if the images are small and there aren't a lot of them -- a blob in the DB is probably fine (easier to backup, control access, transactions, etc). But the performance is bad compared to the filesystem -- it's a tradeoff. Most real applications (and especially big websites) use the filesystem, but it's perfectly reasonable to use blobs in some cases.
The blob (or file) is just going to be the encoded data (JPG) -- it's the exact same stream of bytes. In a web app, you would use an img tag -- if you are building a desktop GUI, look at what components it has for displaying images.
If you are using a blob, and need to display in a web app, the src of the img tag will be set to a script/view/etc that returns a content-type set to the mime-type of the image (e.g. image/jpeg) and the content of the blob.