I am not an expert on this, Dee, so maybe someone will respond who knows the correct lingo better than I.
By "your own server" I didn't mean your own PC sitting in your house. I meant personal web sites that you own, for instance like when Yahoo or AOL or some big Internet service provider lets you have space (often for free) to house your own pictures. Like the pictures on Toni's or Realtor Gal's personal site.
You are correct that GS does not allow you to upload images (or anything else) directly from your PC.
I believe that Google merely provides a link to the image, along with a warning about possible copyright issues (which most people ignore, and use the pictures any way they want to).
Anyway, if a picture is copyrighted (it is not always easy to tell if this is the case except for professional photographers and commencial sites displaying their wares), you are not supposed to post it unless you have the pemission of the copyright holder. But it is OK to post the link, along with a statement to the effect that this image is copyrighted by so-and-so (people mostly dispense with that courtesy).
The other issue is bandwidth theft. If you own a web site with small bandwidth, and if too many people try to access your site, they won't be able to, or it will slow down or maybe even crash. If someone posts an image (rather than a URL) that is on that site, then every time someone looks at that page on GS, whether they want to or not, they are automatically linked to the person's web site, using up his/her bandwidth (which the site owner is paying for). So owners of small web sites don't like for you to do this.
(Also big commercial sites don't like it when you "deep link" to an image. This allows viewers to go directly to the picture they want to see, bypassing all the ads that the site owner is trying to show you. (Screw 'em, LOL.))
If a web site owner gave you permission to use an image from his/her site in your signature on GS, I guess that would be OK.
So anyway, that is my understanding. If someone else can explain these ideas better, please do.
Mathman