JPEG stands for Joint Photographic Experts Group, a bunch of boffins who invented this format to display full-colour photographic images in a portable format with a small file size. Like GIF images, they are also very common on the Web. Their main advantage over GIFs is that they can display true-colour images (up to 16 million colours), which makes them much better for images such as photographs and illustrations with large numbers of colours.
The main disadvantage of the JPEG format is that it is lossy. This means that you lose some of the detail of your image when you convert it to JPEG format. Boundaries between blocks of colour may appear more blurry, and areas with lots of detail will lose their sharpness. On the other hand, JPEGs do preserve all of the colour information in the image, which of course is great for high-colour images such as photographs.
JPEGs also can't do transparency or animation - in these cases, you'll have to use the GIF format (or PNG format for transparency).
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