methinks metz has been watching too many girly animes again where the heroine gets revenge on pervy guys with a magic mallett
that or old tapes of wacaday...
simple rundown:
prep your image. suggestion on size is about 300 to 600 pixels wide, 80 to 120 high, JPG format (if containing photographic material) or GIF (if more line-drawing/text or animation), around 15 to 60kb filesize. be creative but not wantonly finger-paint garish

example: my own is 480x120, would normally be JPG because of the content but is instead a slick, optimised ani-GIF because of the not-really-secret popup text, 35kb in size.
(much narrower than 300 looks silly

, any much wider than 600 may not fit on everyone's screen properly. the height requirement is just to stop the whole screen being wasted by super-tall sigs that are, after all, only there as decoration not content. file size limitation is so modem or cheap-broadband users don't have to wait all day for the page to load or get sent over their download limit by stuff that isnt useful.)
go to
http://imageshack.us and upload it. copy the link code for "direct link" (should be the one at the very bottom)
past this link into your signature, as found behind the Profile button (top left on any board page, just below the UKP logo)
hit UPDATE
sorted.
(basically that's just dinos method expanded for those who dont know all this stuff off by heart

)
EDIT: oops, i didnt want to read that link... limit is now 300x100 and 35kb? I'm in trouble then (actual size is 35.07k) as mine's too big

Nah to be fair, that's really just a guideline. You'll be doing everyone a favour if you can fit what you want to do with it into that space and filesize, but if you have to make it a little bit larger than that you can probably get away with it if you dont go overboard and mess up other people's browsing experience.
e.g. the full-on, 800x600 resolution, 330-ish kb vanilla photograph i saw someone using a day or two ago ... whoopsie ... the 600 pixel limit i reccomended is to avoid browser mishaps being forced on the few people still using that size (800x600) as the full desktop screen resolution on their computers! (they do exist)

600+scrollbar+border+board name sidebar+margins = about 790 pixels..
(managed to chop that one down to about 576x128 and 24k without ruining the effect, by using some Top Gear style rotation, but don't know whether to send it on to the guy to use, or if that'd be considered bad sportsmanship

)