Step 1: Overview
1. Any raster format image (jpg, bmp) has to be very clean without any extraneous pixels or colors to process well
2. Colors - the software tries to make like colors the same and blend them all into one stitch section, or turn light colors into white which can be accidentally deleted when removing "background" color
3. Black is always treated as an outline area and by default the software will try to narrow black areas, or not be able to stitch the area at all
4. "options" don't appear to make much difference and satin vs. fill stitches can be applied haphazzardly
5. While making the images for this Instructable I found that my "new" computer could process images the old one couldn't (more processing power makes a world of difference). The Chinese image of the birds crashes on my old computer.
For best results you want to have a clean image in a vector format (for a good explanation of vector vs. raster files see this video by artexlabel http://www.youtube.com/watch?v=YurPdfuDj6M ). You can spend a lot of time cleaning up raster files (which I did initially) or go for a vector format image which will digitize better.
My 4D software only reads WMF vector files. I used Libre office to export to WMF - cause it is FREE! (http://www.libreoffice.org/), But the main thing is to have a graphics program that supports objects and can save or export to WMF.
Step 2: Good Digitize With a Vector Image
2. In Libre office draw, I traced each discreet area I wanted stitched with a "freeform line filled" (yeah this takes forever if the image is big). You don't have to trace the lines exactly, just make sure foreground objects are right sized, and you can be sloppy with the objects lower in the image stack
3. I then color coded the areas in alternating primary colors to ensure the software would not blend them together
4. I exported the file into WMF format then impoorted into my software
5. Once I have a decent image design, I color changed areas so that they look how I want the final design to stitch out (Note: the dragon's underbelly which in the design is dark brown was stitched in variegated thread)