So I've spent much of this early afternoon figuring this out. As an artist, I thought it would be pretty cool if I could customize my iPhone 3g's wallpaper with an image I had made. Here are the steps so that you can do it at home.
First of all, check the dimensions of your image. You need a 320 x 480 sized jpg file. The dimensions, of course, are in pixels. I used Photoshop to resize one of my previous illustrations.
Next, plug in your iPhone to your computer. Make sure you have iTunes installed beforehand. I did this with my Alienware laptop so yes, this method works with both Macs and regular PCs.
When your iPhone is hooked up and iTunes is open, click on the name of your iPhone under "Devices" in the left hand toolbar.
You will see a great big honking image of your iPhone in the center of iTunes, with a description of how much space it has left, etc. Look for the tabs at the top of the screen - you should see Summary, Info, Apps, etc. Click on "Photos."
Check the box that says "Sync Photos from My Pictures (or choose another folder where you previously stashed your jpg file)." Then click on "Selected folders" and if you're feeling cheeky, "Include videos."
Now click on the folder below that you put your jpg in, OR find a folder, open up a separate browser window, and stash your image inside of one of those folders that is listed.
Click on the Sync button in the lower right hand corner of itunes.
Go to your iPhone, click on Settings, Wallpaper, the large button that shows an icon of your iPhone's current desktop, the folder you just synched with, then your image. This is a lot of clicking, but it's fairly straightforward at this point and shouldn't need much more elaboration than that.
Your image should be the correct size if you followed step one, so don't click on Move and Scale, just hit "Set."
You then have the option to set it for your Home Screen, Lock Screen, or Both. I picked "Set Both."
Your iPhone wallpaper is now way cooler than it was a few minutes ago, and you didn't have to jailbreak your device. Potentially this should also work for your iPod Touch, or your iPad. I don't own either of those devices so I can't test it out yet, but if you - gentle reader - can, please let me know how it works out.
Congratulations! Go eat something delicious.