1. includes/modules/payment/paypal.php
around line 119 you see:
PHP Code:
  function selection() {
    return array(
'id' => $this->code,
                 
'module' => $this->title);
  } 
change to:
PHP Code:
  function selection() {
    return array(
'id' => $this->code,
                 
'module' => '<img src="images/paypal.gif" alt="' $this->title '" />');
  } 

2. Now put a "paypal.gif" in your /images folder



3. Now you'll have an IE bug to work around, so do this:
includes/templates/YOURTEMPLATE/templates/tpl_checkout_payment_default.php
line 136 has:
HTML Code:
<label for="pmt-<?php echo $selection[$i]['id']; ?>" class="radioButtonLabel"><?php echo $selection[$i]['module']; ?></label>
change to:
HTML Code:
<label for="pmt-<?php echo $selection[$i]['id']; ?>" class="radioButtonLabel"<?php if (strstr(strtolower($selection[$i]['module']), '<img')) echo ' onclick="document.getElementById(\'pmt-'.$selection[$i]['id'].\').click();"'; ?>><?php echo $selection[$i]['module']; ?></label>