I've never experienced a problem in XP with using .jpgs as walls, but then I've always changed my walls through display properties. But in Skin Studio, under the Personality section, the attribute Desktop Wallpaper has the constraint of a BMP image. When I tried to use a .jpg, SS gave me an error. I tried editing the file in notepad to use a .jpg, but when I loaded the skin, the wallpaper would not apply, as if the attribute were being ignored. When I used a .bmp, the wall loaded just fine, so I am concluding that .bmp's are required by WB if we want to include a wall in a skin.
I find it really odd that WB would have a constraint that XP, for most people, doesn't have.