You have to upload the picture to a different service, then link to it from here (using the insert picture button). I use Google for mine.
If you don't have an online photo hosting service like Photobucket, Flickr, etc., and if the photo you want is available on-line, you can right click the photo and 'Copy URL' into the address bar using the little picture insert icon (the tree) above. If the picture you want is not hosted online anywhere, you have to use a hosting service as far as I know.
I'm trying to add a picture to my signature. I'm using the imageshack and photobucket, but none of them are working....what should i do?