If Ted Stevens is reelected and then convicted...

[Sam Spade]

Pretty sure that the result is:

1) If he resigns before his term is up, Palin can either choose to appoint someone for the remainder of that term;
2) Regardless, when the new term begins, Palin/Parnell can appoint a person to fill the seat vacated, even though he won the seat.  He still won the election - he just can't take office.  Of course, that seat would be up sometime in the next two years or so.

[Sam Spade]

is he allowed to serve in the Senate from jail?

Unless the Senate expelled him (which they probably would), yes.