By design Pub 2003 will use png if it deems it appropriate for image
fidelity.
The option is misleading and confusing. Basically if checked you are saying
you want Publisher to use png by default.
The best thing to do is to only insert into the pub web document a jpg that
has already been saved down ( in a photo editor) to a web resolution of 96
dpi rather then using a print quality resolution of 300 dpi.
The latter meaning you might get a png to maintain fidelity.
By design 2003 is meant to use the best quality graphic in a web page that
the end browser will support.

--
David Bartosik - MS MVP
for Publisher help:
www.davidbartosik.com
enter to win Pub 2003:
www.davidbartosik.com/giveaway.aspx