Exactly right-- photoshop is used to do things like cut out your images of characters from their background and put them together with layers, filters and textures to get the overall "look" of the sig.

You then just open your photoshop file in ImageReady and use it to make pieces of your image animate. If you're not making a sig with animation, you don't need to use it at all.

Edit: Photoshop 6 is quite good, but 7.0 has some really neat tools like the healing brush that 6 doesn't have, and CS (i.e. 8) has some great color matching utilities that allow you to easily match the colors in two different images (though I haven't really used that function yet it can definately come in handy when you're putting images together from a variety of sources.)