This feature worked fine for me when I was running MFT version 2.4, but since the update to 2.8 back in May it's been broken (near as I can tell).
I've tired BMP, GIF, JPG, and PNG files. All of them are smaller than 1.5 MB, sized to 800 x 378, and are at 72 dpi. Also, the JPGs are files that worked fine w/ MFT version 2.4. I suspect that while trying to fix other things for version 2.8 this is a feature that was broken.
Edge_guy, what version of MFT are you currently running?