Yes you can use a jpeg. Just make sure that the jpeg is the same aspect ratio as your Premier project settings (i.e. 720 x 480 or whatever). You may need to use Photoshop or another photo editor to get this right. Depending on your video card you may have to render the image before you will see the image when you play the timeline.
I don't think you can set the aspect ratio in Paint. You could just create a document that has that aspect in any available graphics program, import your graphic/photo and then export that to a jpeg if you can. Also Premiere will size the graphic to fit the frame, it just may have to be stretched or cropped.
Premiere 6.5 does automatically resize pictures to fit the frame, oftentimes making distorted images. I prefer to just right-click on the pic, and select 'Maintain Aspect Ratio'. Portrait-oriented photos do not completely fill the frame (in width), but I think that's better than cropping the image to the frame size. My two cents.
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