Adobe's flagship program and still their best seller. Photoshop is the Microsoft Office of graphic design, often imitated but never duplicated in terms of sheer power and flexibility.
The other, cheaper graphics editing tools that do exist (Paint Shop Pro, the GIMP, et.al.) work by targetting consumers who just want to touch up digital snapshots or create Web graphics. Photoshop, by comparison, is targetted at professionals who need things like gamma correction, CMYK color separation, and the ability to edit really large files really fast. At the same time, it's easy-to-use interface made it accessible to non-professionals and helped cause its rapid early popularity.
Not many people can remember Photoshop before version 3.0 came out. (This may be because 3.0 was also the version out at the same time NCSA Mosaic was making the graphical World Wide Web popular.) But the original program was created in 1987 by Thomas Knoll with his brother John, shortly after buying his second and much-adored Apple Macintosh, and was simply called "Display". They didn't sell it, but their need for new tools (like gamma correction) led to its refinement into the application's second version, ImagePro. This version featured a new, infinitely-expandable plug-in architecture, still the most useful feature of Photoshop today.
At this point John suggested they sell the package, leading to Thomas procrastinating his thesis on computer imaging while they refined the product and gave it the name "Photoshop". The eventual buyer was a company called Barneyscan, which bundled it (version 0.87) with their slide scanners. That was in early 1988. A few months later Adobe was sold on a demo of the product, and by early 1990 the software was refined enough to ship with the Adobe name on it (on a single 800K floppy disk, believe it or not). Version 2.0 shipped later that year. But 1993's version 2.5 became the real landmark for the product, since that was when Photoshop became available both for Apple's PowerPC Macs and for Windows.
Photoshop 1.0, 2.0 and 2.5 used different file formats than version 3.0, which introduced multiple layers, but every version since has maintained backwards compatability with 3.0 files (unlike, say, Microsoft Word which seems to develop new and incompatible formats with every iteration). Not surprisingly, the toolbar itself has changed very little since 1.0, with icons being rearranged and smoothed out but never altered.
Thomas Knoll never did finish his thesis. (Update: wonko points out that John Knoll has since gone on to work as a visual effects supervisor for ILM.)