Even though FW comes with a built-in editor, i find it much easier to open the files and alter them directly.
It is much easier to use, as you can easily move units from/to slots and between scenarios...
As for the formats, MS Paint does not open gifs (or at least didn't when i last used it

) so i use PSP.
There are some files which the game recognizes in .bmp format (though there are some that it doesn't, such as city.gif, which is the city screen background. also, it must be a version 89a noninterlaced gif IIRC)
Anyway, i use .gif format only