@cardsfan27 - I don't have all of the answers for you, but I think I can at least help you out with your problem. I, too, have often wondered why people talk about the pixels in images, since all computer pictures have to have them.
Anyway, as far as designing a shirt goes, I would say your best bet would be to go with a gif image. I don't know why it is, but one of the advantages a gif has is that it can be saved with a clear background. A jpeg has to have some color behind it for whatever reason. Unless you have a square or rectangular image, you'll probably need a gif to make a good shirt.
If you're editing real camera pictures, though, jpegs are the best. That is because they can handle almost any color, whereas gifs only recognize 200-some colors. Good luck!