I have the FTM User Manual for version 6 open on page 169 and it states:
When you have ...
Compatible file formats include (*.BMP), (*.PCX), (*.TIF), (*.JPG) and (*.JFF).
Use this menu choice ....
Picture/Object: Insert Picture from file, described on page 175.
Page 175
Picture/Object: Insert Object
Using the Insert Object command you can insert existing OLE objects into the Scrapbook. OLE objects can include pictures, text, spreadsheets, sound clips and video clips.
Basically, you should be able to insert a .JPG object. I am just wondering whether this is a recent problem as you are using a fairly old version of FTM, originally written for Windows 95, but still usable on Windows XP. It could be that Windows may not recognise the .JPG file extension because it has lost a file name association. If you double click a .JPG file name using Windows Explorer which program opens the file by default? Is it Windows Picture and Fax Viewer?