If you're going to try using image ads as part of your SEM campaigns, the steps to include image ads are very similar to text ads. Please note: Image ads can only be displayed on Google's Content Network, so it's recommended that you have separate campaigns for your image ads for complete control.
After setting up the appropriate campaign, you will need to simply choose New ad and then Image ad from the pull-down menu. A dialogue box will open, seen in the screnshot below.
In Google's latest version, they've added a pretty interesting new feature. With the website you chose during your campaign setup, Google automatically crawls your website for design and content. Then, it produces suggested ads within minutes. Below is a screenshot of a quick scan of www.webucator.com. You can then edit those ads right within the interface.
The ad sizes avalable to you are listed on the bottom right, along with accepted file types. Once you have an ad ready to go, you can simply insert your ad and choose the appropriate display and destination URL's. Once you hit Save ad, as long as the file size is correct, give Google a day to approve your ad, and then you'll have the chance to go live.
Two additional notes: