I currently styling my site and I noticed that if I apply line-height to my page-wrap it affects any image used in my page, I start seeing a gap between the images and any other elements below or above the image.
Transitional is basically an admission that your code is no good… an attempt at modern markup but with lots of outdated code.
Definitely use Strict and fix the problems instead of pasting over them. It will stand you in good stead in future. The real fix for the problem was vertical-align:bottom, as dresden_phoenix said.
Yes, line-height should affect images (if they haven’t been set to some kind of block context). They are not considered text, but inlines (and text is also inline).
I personally believe Mozilla browsers are correct when you have an image not appear: the dimensions of the image are gone (inlines can’t have set dimensions, but the actual file the img tag calls does).