It pulls the first ATTACHMENT for the first entry from the database. Therefore, if you linked in images from an external source only, it will show the default image. If you don't have an attachment in the first post of a thread, or in a blog entry, or in a CMS article, then it will also show the default image. There isn't a good way that I can think of right now to do it differently. If it was an image from an external source, then I'd have to somehow load the message, search inside the message for IMG tags, extract the link from between the tags, and hope that it works.
As far as the size goes, RIGHT NOW it is making the image fit the width of the slider. So if the first attachment is 100px wide, and your slider is 800px wide, its going to upsize the image by a factor of 8. I am looking to change the way that works in a future version, but as of right now, I haven't thought of a good way to do it. There are so many variables in image size and slider size that its hard to set it to a specific way. For instance, if I resized the image so that it would fit the height of the slider (say 250px), then a normal picture that is wider than tall would probably look ok. But if the image was really tall and skinny (250x1000px, lets say), then you'd end up with a very small image inside the slider (63x250px for the example given). So as you can see, its hard to try to define how best to get a picture in there an always make it look perfect.