Image tags have 6 elements that must be present, even if not used in that particular image: source, height, width, horizontal alignment, vertical alignment, alternate text, and border. The tag itself should look like this:
<img src="/img/imgname.gif(or jpg)"
All images should be as small in file size as possible without compromising quality (Photoshop crunches files better than any other program I've found), and need to be .gif or .jpg. Transparent .gifs are useful, if done well - please contact me for more details on these and other more advanced graphic/image questions.
Background images should be used sparingly, and only if they 1. add significantly to the overall aesthetic, 2. do not make any part of the content hard to read/view and 3. are seamless.