I know some guidelines for using the bugtracker are being made. Until then, and while anyone can change the whole report (including priorities), this is how I would use it:
Most importantly, without guidelines, no-one can blame you for making a mistake. Being corrected does not mean you are misusing the BT. When you are corrected, especially by someone who seems to know what he (or she) is doing, do not argue and change things immediately back though.
About where to file a bug: I think most bugs will be under client. It is really difficult to know whether something is handled on client or server side if you do not know the code, so if you are not sure put it under client. It also has more descriptive categories there (like magic, which I personally think is often a server side scripting problem

).
More important is to state which version and if relevant OS, you are using.
In general, people checking the bug tracker regularly (like me) sort bugs on date or id, so new changes are seen on top. Not on priority. So setting a new bug with high priority does nothing for it being noticed. A too high priority will just be changed more quickly. Sorting on priority does make sense to see which older bugs should get some attention, especially with a coming release. For that reason, I did lower priority on several bugs a while ago. Critical bugs are now those that crash client or server, can get you killed, or allow big exploits. Significant are those that do affect game play, but do not require the server to be shutdown for days and wipes done, if not fixed. SInce my changes were not corrected, I consider this a good way. Some priority 5 critical bugs will not be fixed soon (for example the sewer entrance problem), but they are there to be not forgotten, and can be avoided in game if you know about them.
My suggestion is to just keep defaults in the bug for priority and such, when you have no idea what to do. It will probably be changed anyway. WHen you do have an idea, just change it and see if it stays that way. When you are not corrected for several bugs, you will get an idea of how to file the reports.
The same goes for closing bugs. Do not do so until you have a very good idea why you are doing it. It is better to add a comment that a bug should be closed, and why.
Hope this helps, and please keep filing bugs.

Edit: Zan posted while I wrote, but it did not show when I pressed save

. I think the way zan described is exactly what I mean
