I worked on a dot matrix tool years ago for someone who was creating a custom pinball game - this might help those trying to make images. I'm not sure if the same applies, but here's what we did.
If converting color images into low-color format for use on a dot matrix display; try creating a palette file for photoshop (or your image tool of choice) that can be loaded when converting the image to 'dot matrix' color levels. For example, we used something like (RGB values shown)
You create the palette file in photoshop first, using only those colors (color mode, indexed color, custom - then create a palette). For oga's tool, you may need to use something like :
Save the palette to a file/place you will know where it is, you'll have to re-load it every time photoshop restarts when you want to convert things.
Next, get your full color image. You'll probably want to adjust the contrast and brightness and tidy up any 'noisy' areas before converting and cropping/resizing the image. You'll have to play with this a bit until you find a way that works best. Resize the image to the desired size, using nearest neighbor resampling, if I'm remembering correctly (I think I played with this a bit, really depends on how 'busy' the image is).
Now, you can try next to convert it using the palette file you created. If it doesn't look right, undo the change and tweak it more, for example increasing the contrast and maybe lowering the brightness. You'll also want to play with dithering types; for example 'pattern' or 'diffusion'. Try it, and see how it looks. If you don't like it, undo, and try a different type of dithering; or none - again this kind of depends on the image and how it converts and looks.
Again, I should mention I'm not familiar with the new Stern stuff, at the time we were limited to 4 shades + 'off'. But it might be a good starting point. If Stern stuff can use more colors, you could even try creating a 8 or 16 color grayscale palette (space out the intensities evenly through the color range) and see if that works. The reason I mention this is because doing this first on a computer might save you the hassle of having to re-flash the game every time you want to get an idea of how a DMD might display it. If it looks funky in grayscale, it will look like dog crap on a DMD. You'll want to compare what you see on your screen the first time you flash things to determine if you need to adjust your palette on the PC to reflect more accurately what the DMD is actually doing with the image.
I tried to type this out quick and I'm tired so there may be mistakes.