My grandmother gave me a whole box of old costume jewelry a while back, including a ton of old watches. This was what came out of it. Believe it or not it is easy as pie! Hopefully can get some step by step pictures up first.
First, find a watch with a good shape. Turn it over and look at the back, and try and find the notch that allows the back of the watch to be removed and the batteries to be replaced. It's usually indicated by a small arrow.
Take your small flat head screw driver and insert it into that notch and carefully pry off the back. This may take a few tries. If you are having a particularly hard time getting off the back, you can take it to any store with a jewelry counter and have them remove it for you.
Once you get the back off, carefully take out the guts of the watch. You can save these if you want. They are fantastic for steampunk projects.
Find a picture that fits into the back piece of your watch. Glue it to the inside of the back piece, so that when the piece is replaced, the picture will be visible through the watch face. You can put some Mod podge over the image to help it stay better. Set aside and let dry.
Replace the watch back and your done!