Personally, I ONLY use PNG format images in KM or anything I can for that matter. It's lossless compression abilities allows me to make the images take up as little space as possible.

This site I did, http://www.nssclan.org is all PNG files. The only one that is blurry is the Socom Logo but I didn't make that one and it has a motion script added to it until it goes to the static image. Notice the sharpness issue as it loads?