Obviously, inline images are preferred. GIF, JPG, TIFF, PCX, BMP, etc. Out of all the different formats, however, only two of them can be used in a Web page without the browser going nuts. Please make sure that the image you use in your Web page has either the .gif or .jpg extension on the end. GIF's seem to be more popular than JPG's, but JPG's have advantages.
Images can come from various different sources.
The easiest way to come up with an image, is to have a regular photograph scanned and saved in a .jpg or .gif format. Another option is clip art. Clip art is professional quality artwork done by someone else that can be used in your own creations. Clip art can be purchased at any retail store selling software. Yet another option is to grab an image from another Web page.