When using images, they should be cited in the proper format. When used in the text of a paper they should be captioned and include a citation to where the author found the image.
Use of images in student work and for educational purposes is considered fair use by the Visual Resources Association. All images should be properly cited with information on the copyright holder, if known. For more information about the fair use of images for educational purposes see the VRA's Statement on the Fair Use of Images for Teaching, Research, and Study.
Also, see the College Art Association's information on intellectual property and the use of images here.
For more information see the page for Dickinson's Visual Resources Center.