I was talking about my iPhone 🙂 I tried 2 different ways and both does not work for me:
1) viewing photos->photo albums->then used as wallpaper
2) settings->wallpaper (stock wallpaper and my own wallpaper does not work)
You'll find lots of strong feelings around here about it, but I love having a jailbroken phone because of the themes (I have the Palm Pre theme right now), running apps in the background, video recording, and lots of other goodies!
Some of the advantages will go away after 3.0, but you still won't be able to theme and run apps in the background without jailbreaking.
Jailbreaking is a great way to increase the functionality of your phone, it is super easy to do. Some people complain about lag, and some don't. I personally just installed Winterboard Lite (the app that themes your phone), it is less of a resource hog, and my phone runs much faster and more peppy than it did before. 🙂