The Arduino Picture Frame only supports .BMP files. It can handle monochrome, 16-colour, 256-colour and 24 bit bitmaps, which pretty much covers anything that Microsoft Paint can create.
There is no size limit, although the picture frame doesn't do any scaling so anything bigger than 320 by 240 pixels will not be displayed in full. Paint can do one image at a time - you can use the resize tool to scale photos down, then save as .BMP type. Other programs might allow batch processing of multiple files but we found that Paint was enough for our purposes.
The sketch also includes a routine for finding the Long File Name of the file and displaying it. The screen can only hold 53 characters across and can't decode names more than 104 characters due to memory limitations. If you like, you can give your files relevant names so that they will be displayed over the pictures.
The last point to remember about the files is that the sketch only reads from the root folder - any files in subfolders are ignored.
Unplug the UNO, place the Micro SD Card into the card slot on the LCD Shield and then plug the UNO back in. The first picture should appear within a few seconds and then cycle through the rest of the files in the folder. Note, that the pictures are drawn from the bottom up - this is due to the way that .BMP files are usually laid out.