Follow the onscreen directions to convert a photo. See http://scratch.mit.edu/discuss/topic/63300/ for example results To use your own photo, click see inside and add your own photos as backdrops. Remix to save. To save the result, click see inside and then right click on the stage and choose "save picture of stage".
It takes a while to run. On my computer, it takes about two minutes. It may take longer for you. The dog pictures were taken by me. The other photos are from Wikimedia Commons: http://goo.gl/VLI9AL http://goo.gl/0NaZWU http://goo.gl/PoFrMh http://goo.gl/zkt0cS