Update: Photoshop CS3
I am currently evaluating th ebeta version of Adobe Photoshop CS3. The main reason for this is that it runs natively on Intel Macs such as my MacBook Pro Core 2 Duo. There are a few minor (mainly cosmetic) bugs still, but overall this version is very good. Its stable, fast, and it hasn't become too bloated like a lot of software which has been revised this often. Photoshop is still one of my favourite programs of all time!
Update: Photoshop CS
Photoshop CS doesn't give me anything revolutionary of totally new that I didn't have in previous versions, but it introduces several minor changes and enhancements which make it worth using. Its also more stable, and I can't remember this version ever crashing. Version 7 was quite reliable but did suffer from occasional crashes, especially when creating web graphics.
Update: Photoshop 7
Photoshop 7 runs "natively" in Mac OS X (it is a Carbon program), and if you have a faster machine (its nice on 1 GHz or more but a bit slow on 450 MHz or less) it is reliable, fast and very capable. It benefits from Mac OS X's memory management and is still the program for general graphics work.
Update: Photoshop 6
Has some useful new features (especially when working with text) but also is slower, bigger and needs more memory. Also, some commands have been changed around so it takes a while to get used to it.
Update: Photoshop 5.5
The "save for web function" in this version makes life so much easier for anyone who creates web graphics (like I do). This version still uses a reasonable amount of memory and is fast enough even on older Power Macs.
Update: Photoshop 5
Photoshop 5 has some useful enhancements over version 4. The most significant for many users is the history palette which allows undoing and re-doing of any change done to the document since it was opened.
Text editing is also enhanced so that as text is entered it appears on the screen in the chosen location which can be moved while the text entry dialog is active. Its not quite as convenient as the text entry in place like some other programs but its better than previous versions. Another major enhancement is that after text is entered it can be re-edited unless that text level has been rendered as a bitmap.
If you are used to using version 4 you might find the changed keyboard commands, etc a bit tricky to adapt to in version 5 but once you do learn them, they are more logical and flexible. For example pressing "L" will always select the current lasso tool, even if its already selected. To cycle through the different lasso options, press shift-L instead.
Its worth learning the keyboard commands in Photoshop. Typing a key instead of clicking a palette tool allows you to leave the cursor in the location you are currently working on. The contextual menu is also worth using. Sometimes you can turn the palettes off, providing lots of extra screen "real estate" to work in.
Most serious Mac users are familiar with Photoshop, so what else is there to say? Photoshop is an awesome tool for graphics manipulation. The only problem is you really need awesome hardware to run it! I run it on a PowerMac 8100/80av with 48MB of RAM and 4GB of hard disk and a PowerMac 7200/120 32M, 3.5G. It runs nicely on these, especially the 7200/120 - and its even better on a 604 based PowerMac. I can just run it on smaller files with my little Centris 610 12/500 at home but its a bit slow in places and memory is really tight! Recommended memory on a Power Mac is (wait for it) 13MB - that's for version 3, I don't even want to talk about memory for version 4! [Note. Oh wow, I don't believe I said that. A few years later and programs using 100M of RAM aren't unusual!]
I haven't used version 4 for any serious work yet so the comments here apply to version 3. I often recommend using earlier versions such as 2.5 which have less severe hardware requirements, especially if you don't need some of the more advanced features of version 3 such as layers. Remember that version 3 is the first to be fully native on Power Macs, although there is an plug-in for version 2.5 to make the core code native. RISC machines like the Power Mac are naturals for running programs like this, tests have shown Power Macs running Photoshop 3 times faster than equivalent Pentiums!
All of the graphics on my Web pages were created in Photoshop and saved in JPEG and GIF format. Like all the programs I advocate on these pages I have no connection with the manufacturers and recommend these products solely on how useful I found them for work done for my clients and myself.