I believe the native the screen's dimensions are 960x854. A photo that size will have 1:1 pixel mapping. I've used pics much smaller 500 x 350, and not be in proper format (e.g. 16:9, 5x4, etc), and when I added the pic, it stretched to fit. It will also open the "crop" so your pic, or as much of it that it can, will fit, if its too big.
I've used Microsoft Picture Manager, part of Office '07, and it seems much easier to edit than previous versions. Doing any editing on the phone may be kinda hard...I'd stick to whatever's there as it does a decent job with too large/small pics.