Regarding vertical walls, it doesn't really matter how you made them (whether in the terrain editor or from a bitmap). The problem is always the same.

In order to eliminate jaggies, you should smooth the transitions of your bitmap in photoshop (for example, using gaussian blur). You may have to use 16 bit images to completely eliminate all jaggies.

I wouldn't use jpg either. Jpeg compression includes artifacts of its own. You should use a lossless format.