<img src="foo.gif" alt="Picture of a Foo.">When a graphical browser sees that embedded image, it requests the document foo.gif from the server, and, if the resulting document is a gif or bitmap file, displays that image embedded into the text. (Some browsers display other formats as well, but gif and xbm are most widely understood.)
If the user's browser doesn't display graphics (for instance,
because it is running on a character terminal), nothing gets loaded;
well-behaved browsers display the alternative text (after the alt=)
instead.