The difference between intarsia and Fair Isle is this:
In intarsia, you just knit with the other colors where needed. In FI, you carry along the yarn in the back of your work and keep the different colors going through the entire row. Actually, the name FI is used incorrectly most of the time-- true FI is a system where you only use 2 colors in each row, you change only one at a time, and after a specific number of rows. It comes from Fair Isle, which is in the North Sea. It was made popular in the 1920s by the then Prince of Wales. (Just how much did you want to know about this?
So here's what to do for intarsia, and when to use it:
You wind up lengths of the yarn that's going to be used for the inserted picture or design, and put it on plastic yarn bobbins, made for this purpose (these http://www.joann.com/joann/catalog.j...RODID=prd31089
or these http://www.joann.com/joann/catalog.j...RODID=prd32018
or these http://www.joann.com/joann/catalog.j...PRODID=prd2734
), or you can make them yourself out of stiff cardboard. Then when you come to that part in your pattern, tie on the new color and just knit for as long as you need it for, and then go back to your main color. Then just leave the picture color, and when you come back on the next row, there it is, waiting for you. If you are going to knit with the picture color for more than 3 sts, then every 3 sts, wind it around the main color yarn in back. This is called stranding, and doing this prevents long loops of the carried color, or tightening which it sounds like you may be having a problem with. When you wind it every 3 sts, just don't do it too tightly so that it won't pull on the fabric. INTARSIA DOESN'T WORK IN THE ROUND. Well, actually, there is a technique for it, where you leave it and the next round you go back and knit it and then pick up the main color again, but it is a little more complicated and since you're new at this, let's not make it more difficult than we need to
. We can get to that later.
You keep the color(s) going the entire time. This works best when there is a constantly repeated pattern, and where you are going to need the colors over and over again, like this http://www.coatsandclark.com/Crafts/...e+Pullover.htm
or this http://www.trailingyarn.com/wp-conte...07/08/lopi.JPG
. You just keep both (or all, depending on how many colors) going througout the entire row, constantly stranding/twisting every 3 sts.