JPEG (short for the 'Joint Photographic Experts Group') have produced produce standards for continuous tone image coding. The "format" uses lossy compression techniques and allows control over the degree of `lossy-ness.' Lossy compression causes loss of image information. For JPEG, this usually means that the image becomes blurred. The degree of blurring is controlled by the quality factor which is normally in the range 50% to 95%. Compression ratios of 30:1 to 50:1 are not unusual for JPEG.
JPEG compression works well with natural images and badly with cartoon images or line drawings. This is because the absence of sharp edges in the former tends to hide the effect of moderate JPEG compression. Some examples of using different quality factors are online.
JPEG files are useful for WWW documents. Local users should find cjpeg (for producing JPEG files), djpeg (for decompressing JPEG files), and gimp (for displaying and processing JPEG files) useful. xfig can load JPEG files in too, but it can't edit them. jpeg2ps can be used to convert JPEG files to postscript level 2 for printing.
The JPEG FAQ covers many issues.