No DTD on your document. That makes IE go in quirks mode. Add this at the top of your html:
<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN"
and make sure these are always the first lines in your html.
Also, you have this as IE interpreted code:
<img width="250" <font color='"Red"'>height="1"</font> src="http://www.sitepoint.com/forums/images/image2.jpg"/>
where red means wrong ; ),
even though your mark up is missing height value:
<img src="images/image1.jpg" <font color='"Red"'>height=""</font> width="250"/>
As maya said, put proper width AND height values on your images, or don't put any at all.