Requirements for GRUB splashimages:
1. xpm.gz file type
3. 14 colors only
If you already have your image:
1. Gzip your xpm file and put it into your /boot/grub directory (as root)
2. Edit your grub.conf file
# nano /boot/grub/grub.conf
and add this line:
Change the partition and directory according to your system's setup.
How to convert an image to only 14 colors
To get the GIMP to use only a 14 color palette, right click on your file and press ALT+I and put 14 where it says "Generate Optimal Palette:" on the top of the menu. If ALT+I doesn't get you there then right click on the image and go to:
Specify you want 14 colors and then if you want (*recommended*)
select NO DITHERING.
This will tell the gimp not to try to guess colors in between areas.
It does not have to be filename.xpm.gz only, but, compressed files load quicker that uncompressed files.
You can also change the foreground and background color of the menu, like this:
Just put something like the following in your menu.lst file:
foreground = ffffff
(for text color)
background = 000000
(for background color)
ffffff = white
000000 = black
333333 = cyan dark
666666 = cyan light
View images of currently available splashimages
Download working publically available GRUB splash images
The complete GRUB Splash Image Howto is here
Good Luck !!!