To add a normal image, for example a jpg or a gif, you will need to provide a world file, a small text file that says where the corners of the image is. The extension of a world file is the first and last letters of the image extension with w appended at the end. The coordinates are in the units of the projections, so -180,180 -90,90 for lat/long.
If your image is not in lat/long you will have to include a .prj file, which is a text file with the WKT definition of the coordinate system that should be used.

Example:

If your image is world.jpg then you need a world.jgw file and optionally a world.prj file.

An example world.jgw

 
            0.0359281435
            0.0000000000
            0.0000000000
           -0.0359281437
         -179.9820349282
           89.9820359281
 

an example world.prj is:

 GEOGCS["GCS_WGS_1984", DATUM["WGS_1984", SPHEROID["WGS_1984",6378137,298.257223563]], PRIMEM["Greenwich",0], UNIT["Degree",0.017453292519943295]]
 

References

ESRI World Image format
See also http://geos.gsi.gov.il/vladi/FEFLOW/help/general/file_format.html#tfw_file

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