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Graphics in XML in generally handled using the same syntax as in HTML - just remember the closing tag!
The advantage in XML, is though that you more control of the image. You can decide exactly when the image should be loaded, when it should disappear again, where it should appear, where is should re-appear and much more, without using scripting.
The major browser vendors will decide though what formats will be supported. The restriction lies not in XML, but in the browser...