Images are best imported as " billboards" unless you specifically want to use them as a texture for an object (in that case you can import them directly using the object properties window). Choose the "Make Billboard" option from the File menu and go from there - the Import window will list the supported file types for you.
I've never had any problems with any of the formats, but if I have a choice, I'll either use .jpeg to keep files small or .png, which is the format most of the CMU images use.

Alpha level transparency is supported for .png (and, I think, .gif, although I'm not sure). As a rough rule of thumb, 64 pixels translate into 1 meter of Alice distance, at least for .jpeg files, so use caution if you try to import small images and then scale them up.
Once you have the image imported, it will appear as a texture option whenever you set a texture, so one billboard in a world can be used to display many different images. If you have access to the Herbert text, check out Tutorial 6D, pp. 176-179, for more information.