the Wallpaper1.bmp file in "%userprofile%\Local Settings\Application Data\Microsoft" gets annoying, any way 2 get rid of it or make it a .jpeg? for smaller size on disk & less resource usage ?

Since its the wall paper file that Windows displays on your desktop, the answer is no, unless you want just a simple plain colour desktop, then you can delete that file...

Try playing around with adding a null file named wallpaper1.bmp and setting the permissions so that no one can access it. If that doesnt work, make a service that constantly uses the file so that it cant be accessed or replaced.

Yes, but that will still eat up system resources. The only way to truley get rid of it is by not having a desktop wallpaper.