You won't get images when you use the_excerpt.
Here's an article that explains other excerpt options:
I see [...] at the end of all the posts now. How do I turn that into a link or add a "read more" link to the end?
You have to modify the template - home page would be index.php - and add the text (and a link that takes them to the full article).
<p>Click here to <a href="<?php the_permalink(); ?>">read the full post</a></p>
Check what you are using for URL's on your images - you want to use full paths, not relative paths - http://mydomain.com/blog/wp-content/uploads/whatever/myphoto.jpg
That path must be set up for where YOUR image files are located in your installation.
the_excerpt strips out images.
you can check these plugins too - I've not worked with them
You probably don't need to make a custom home page template