Use acid and lignin free paper and non fading pens. The gel pens you get at Kmart and places like that tend to fade. If you've got the money invest in some Creative Memories pens, they are excellent.

I'd probably do a 2 page spread full of photos of one particular theme ie: eating, walking, birthday, grandparents or a day out etc. Place the envelope somewhere on the page as you would a journal box. That way you could write about the specific event or theme including the childs milestones, reaction to the event/theme etc the photos relate to.

I hope that makes sense, I tend to ramble when I'm getting sleepy