I like to use www.imgur.com
to host my images.
Click browse and select the image you want to upload. Click Continue. When it finishes, on the left you'll see code for message boards. Copy that. Go to your UserCP click Edit Signature and paste the code there. Click Save signature.
Don't forget that your max signature size is 500x100 pixels. If the picture that you're uploading is too big (over 500x100pixels) Imgur will let you edit the file. After you select the file and before you hit continue, select the checkbox next to edit. On the edit screen under the image you'll see the current size of the image. Change it to something under 500x100 and select continue.
If you want to put up a larger image, become a supporter!