You need to upload the picture somewhere first before you can use it in your signature -- you can use the gallery or something like http://www.photobucket.com. Don't use an online photo album that requires a password to view, such as Yahoo or Snapfish. Photobucket works well.

Then, in the section of your profile that lets you type a signature, insert [ image ]location of your image[ /image ] (without the spaces inside the brackets). There is a little note next to the signature box saying "ubbcode" - click that for more instructions.