Simply put, Photoshop has the ability to open and save a variety of graphic files.
One thing to remember is that when you open an image file other than a Photoshop one, the image will default to the background layer.
1) .psd, .pdd, .eps:
These are Photoshop files. This format saves all of the information found in all of the layers. This format works best if you are going to continue to work with a picture. A downside can be that the file size may be quite large. You should save your work in the most recent Photoshop format available. An example would be is you have Photoshop CS and are sent a Photoshop 7 file, you would want to save it as a Photoshop CS file to maintain any elements that may not be supported in Photoshop 7.
2) .jpg, .jpeg .jpe
This format compresses images in a way that information such as color subtleties and other details are lost. You can select to what extreme you want to compress the image. This is the most suitable format for use on the web. Consists of small file sizes and millions of colors.
3) tif, .tiff
Early scanners typically used this format. It will generate high quality images, but very large files making it inappropriate for use on the web.
This format can be pronounced both "Gif" and "Jif". This file is one of the most popular for web graphics as it loads quickly. Has an 8 bit format (256 colors max.). It can support transparent color and animation.