A picture with many people in it should be big enough to see each person clearly. A very good photo or one that is of someone that figures prominently in the story should be big enough to enjoy easily. A large illustration emphasizes the point it illustrates. The text in a newspaper article or document should be readable. You can make the photos you have any size you like by scanning them at a higher resolution or higher percentage of the original (depending on how your scanner works) and then enlarging them according to what you would like to highlight.
If you get discouraged with putting trying to place illustrations in the text you could have pages with several photos arranged on them like scrapbook pages interspersed with the text pages. Then just make the text double column to make it more readable.
The captions are an important part of an illustration. Be sure to identify any people in the photo in a way that is easily understandable. Don't forget the date and place of the photo if it is known. A little piece of the text could be used as part of the caption if desired. Many readers will first look at the illustrations and read the captions before they read the text, so it's an effective attention-getter to put something interesting in the caption. Generally speaking, captions are published in a smaller font size and are centered under the illustration. Be sure to leave adequate space around the caption so it doesn't run into the actual text.
I believe it's important to identify the source of the illustration. This is vital if you are using someone else's photo. Even if the illustration is from your own collection, a note in the caption or at the end of the history should indicate that. Also important is to acknowledge any changes you have made--a "photoshop" change or if you have cropped it drastically from the original. Making these type of changes can improve your illustration, but should be noted somewhere.
I am interested in various sources any of you have used for finding good illustrations. What are some pointers you would like to share with the rest of us?