Your web app generally maps to the Rails public folder.
http://youapp.com/images/image1.jpg => /railsappname/public/images/image1.jpg
You can make absolute references to your images using /images/image_name.gif from your views. This also applies to JavaScripts and stylesheets, which map to /javascripts and /stylesheets respectively. Of course you can use relative references, but I've found the safest bet to be absolute.