Origin
Heroes of Newerth is a game based of the very popular Warcraft 3 scenario Defence of the Ancients .On September 2009, (back when the game was still in beta, where bugs are to be expected) user Bali posted an glitched ingame screenshot in the "Off topic" part of the official forums.

"I am not sure what happened here, I think I shift+clicked blacksmith portrait or something and WHAM time-traveled back to the 60's. I had to restart game. Dont think it was my GPU."
The notable thing of the screenshot besides the scambled graphics was that the minimap (normally at the bottom left) was somehow replaced by the character portrait of one of the games heroes; Blacksmith.

Spread
Soon thereafter another user, Rokman, would respond to the original post with the soon to be famous qoute:

This would quickly catch on and other users would respond posting other scenarios when Blacksmith would appear unexpectedly, interrupting whatever is happening and say "TOO BAD IT'S ME BLACKSMITH!!!.
From there it would become a common term associated with him; it's almost that any HoN-player knows it, even thought the character never actually says the quote. There just is something with Blacksmiths blank character expression that seals the deal for hilarity.

The original thread can be found here.

Some responses from the thread and other places on the forums:

The developers have also joined the fun, one of the banners on the forums uses the phrase:

Other uses:
Whenever Blacksmith is on the subject, or the opportunity comes up, it's common to use the phrase on the forums, for comedic effect.

In the game, one of Blacksmith's special traits is that he has a chance to cast any spell more than once for increased damage (called Multicast), causing grief among other players, since they claim it's more about luck than skill playing him. Responding by saying TOO BAD (for example) is a way to say "QQ some more" or "Deal with it".

This can for example be seen on the The HoN MS Paint Rage Dump Thread, where people post comics describing their unlucky moments while playing the game (many times involving Blacksmith).

Notable uses around the internet:
World Of Warcraft Forums
Urbandictionary.com
Gamereplays.org (some of the pictures are reuploaded from the original thread)
Blacksmith on Facebook
Update Log for the game
Game blog about HoN appropriately named 'Too bad it's me'
Someone trying to spread the Lulz

Youtube:
Blacksmith's ingame voice made to say the phrase:

Used ingame as mockery:

Crank Dat Blacksmith:

Gifs:
http://i37.tinypic.com/2d27gxs.gif

http://img40.imageshack.us/img40/8374/jawssamueljackson.gif

http://img255.imageshack.us/img255/9756/arnoldblacksmith.gif

http://img5.imagebanana.com/img/u09u1vnr/TOOBAD.gif

Bonus Flash:
http://z0r.de/1769