Hi,
COLOUR, GRAYSCALE, OR B+W?
It depends on what you want to get out of the text. Some texts need to be in color (slow), some are printed with absurdly narrow margins that make words get blacked out in the gap between pages (grayscale is good here), and some books lay flat and come out beautifully (B+W fast). It depends on what you are working with. In general, though, I do B+W. The files are perfectly legible, they are small, and the OCR works fine. One note of caution to iPad 1 owners: Grayscale and color scans sometimes cause PDFs to crash (incompatible elements and/or RAM issues), so you will need to optimize those files for earlier versions of Acrobat (no big deal, but you may want to keep a copy of the original file somewhere, because it will affect the quality of the scan).
FILE FORMATS
PDF is the best (in my opinion), but if a device doesn't have that, I'd probably go for JPG. It depends on what you are scanning. BMP files will be huge, but they will preserve photographs well. JPG files are compressed, so might not give clear pictures, but for words it is usually just fine, especially on a B+W setting. Test it out on your device, though, to ensure the best results.
CONVERSIONS
I recommend Adobe Acrobat Pro X, especially if you can get it with a student discount (check your university or order online). It has a huge number of features, but mainly I use it to combine files (especially if I used a digital camera or scanner with JPEG) into a PDF, insert an outline (makes viewing on the iPad very convenient), OCR (it also conveniently straightens up pages and flips them to the correct orientation), and optimization. I am sure there are other products out there, and sometimes a stripped down version with limitations is bundled with stuff (ScanSnap, for example), but I have found the full version worth the investment.
APPS
I am very intrigued by the potential of iAnnotate. However, because it doesn't sync with my backup service (Sugarsync), I have not switched to it, and I remain a GoodReader user. I am pretty pleased with it. What I do is dump all of my files into the iPad using GoodReader USB (OSX) or iTunes (I want to get reading right away). I put everything into a folder, and then I sync that folder to Sugarsync. The syncing process can take a while if you have a lot of files, but eventually everything will get synced up with Sugarsync and any other devices you have setup to sync with the folder. So, any annotations I put in a file will automatically appear in the files everywhere else. Sweet.
Obviously, the same process can be used with Dropbox. When my contract is up with Sugarsync, I will probably switch to Dropbox, because it is so well integrated with a lot of the apps I use.