Yes, make your wallpaper a .jpg and zip it up. You can use the actual wallpaper jpg as a screenshot...... I always do. I have a folder on my drive called "Uploads" I put everything I am going to upload in that folder so I always know where to find things. So I put the finished wallpaper jpg in "Uploads", and then open winzip. I create the zip file in uploads too, and then add my jpg from the same folder to the zip file. Close Winzip, log on to wincustomize, go to "submit to gallery", and browse to my Uploads folder where I can easily find the zip file AND the .jpg to use as a screenshot. Easy!!
With regards to size, you should try and make your wallpaper in a standard desktop size like 1680x1050 or 1900x1200 etc. Don't worry TOO much about the size of the files you are uploading, I think wincustomize has a fairly big limit for uploads.
There are no colour restrictions, but wallpapers ARE moderated to some extent for quality or rip offs.
I hope this helps......... 