I've got a jailbroken iPod touch and spent a while with various background images but, in all honesty, they just tend to be distracting and they reduce the legibility of the screen.
Yeah, kinda. Back in the iPhone 1.0.x days with Summerboard 2.x there was the option to control how much to dim the wallpaper. I'd really like that back, and moreover, I'd like for it to be provided officially by Apple as Summerboard 3.x is incredibly buggy.
Even still, when I used a mostly white background, I had no problems with legibility. I found it was dimmed significantly enough.
Yeah it is. Look at the Sudoku text; it blends into the bright part of the background. I will assume that you have the "Dim Wallpaper" option turned off, though.