I use all custom photos I took, several of my pets, favorite movie scenes I captured, or a few images I found. I love that feature that you can customize the screen display while the reader is in sleep mode. I found how to get rid of the message the first day to not detract from the image.
The main reason it's good to convert the images to B&W before transferring is to save on space. Saved space for the images means more room for books. Resize larger images to 800x600, which is the screen resolution, that will help reduce file size. Use a good compression software to further reduce the file sizes (I use an old program SmartSaver Pro which still works flawlessly). While the sample images were about 1700KB, my images are between 100-200KB and still look perfect on the reader.
On a few images, they looked washed out and not much detail on the reader until I upped the contrast and tried again. So while the dog pic here might not look that good for computer viewing, it looks very good on the e-ink screen.