dont worry, we'll get this sorted :)
All you have done is put the logo in the wrong place (you placed it in within the title tag)
Replace your code with this
<?php include(TEMPLATEPATH."/config.inc.php");?>
<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd">
<html xmlns="http://www.w3.org/1999/xhtml" <?php language_attributes(); ?>>
<head profile="http://gmpg.org/xfn/11">
<meta http-equiv="Content-Type" content="<?php bloginfo('html_type'); ?>; charset=<?php bloginfo('charset'); ?>" />
<link rel="alternate" type="application/rss+xml" title="<?php bloginfo('name'); ?> RSS Feed" href="<?php bloginfo('rss2_url'); ?>" />
<link rel="pingback" href="<?php bloginfo('pingback_url'); ?>" />
<link rel="stylesheet" href="<?php bloginfo('stylesheet_url'); ?>" type="text/css" media="screen" />
<link rel="stylesheet" href="<?php bloginfo('template_url'); ?>/css/print.css" type="text/css" media="print" />
<!--[if IE]><link rel="stylesheet" href="<?php bloginfo('template_url'); ?>/css/ie.css" type="text/css" media="screen, projection" /><![endif]-->
<script src="<?php bloginfo('template_url'); ?>/js/jquery-1.2.3.pack.js" type="text/javascript"></script>
<script src="<?php bloginfo('template_url'); ?>/js/theme.js" type="text/javascript"></script>
<script type="text/javascript" src="<?php echo bloginfo(stylesheet_directory) .'/domtab.js'; ?>"></script>
<?php wp_head(); ?>
<title><?php wp_title(' '); ?><?php if(wp_title(' ', false)) { echo ' -'; } ?></title>
</head>
<body>
<div class="container">
<div id="header">
<div id="headline">
<div id="headline_h1">
<?php if (is_home()) { ?>
<h1><a href="<?php echo get_option('home'); ?>" title="<?php _e('Home'); ?>"><img src="<?php bloginfo('template_url'); ?>/logo.gif" border="0" alt="<?php bloginfo('name'); ?>"></a></h1>
<?php
} else { ?>
<h2><a href="<?php echo get_option('home'); ?>" title="<?php _e('Home'); ?>"><img src="<?php bloginfo('template_url'); ?>/logo.gif" border="0" alt="<?php bloginfo('name'); ?>"></a></h2>
<?php } ?>
few things to note about the above
Here is the image code
<img src="<?php bloginfo('template_url'); ?>/logo.gif" border="0" alt="<?php bloginfo('name'); ?>">
1. If you want to keep things tidy, place the logo in the images folder and use src=<?php bloginfo('template_url'); ?>"/images/logo.gif"
2. Specify the width of the logo within the img tag ie. a logo which is 200 pixels wide and 50 pixels high would be
<img src="<?php bloginfo('template_url'); ?>/logo.gif" border="0" width="200" height="50" alt="<?php bloginfo('name'); ?>">
3. With regards to the code <?php bloginfo('name'); ?>, all this does is generate the name of your blog for the image. The alt tag will then show you the name of your blog when you scroll over the image.