This verb has even made its way into the dictionary (Merriam-Webster online dictionary, 2012):
pho·to·shop, transitive verb, often capitalized \ˈfō-(ˌ)tō-ˌshäp\
to alter (a digital image) with Photoshop software or other image-editing software especially in a way that distorts reality (as for deliberately deceptive purposes)
This all goes back to the late 1980′s to a University of Michigan graduate student Thomas Knoll, who wrote a program for the Macintosh to display grayscale images on monochrome displays. Working with his brother John, Thomas eventually developed a full-fledged image editing program called ImagePro. Thomas eventually named is program Photoshop, and with that a new word was born.
After demoing his program to Apple and Adobe, Adobe decided to purchase the licence to distribute Photoshop and in 1990 Photoshop 1.0.1 was released and the rest is history.
History, indeed, as the great Computer History Museum (if you have never been, you must go), has just released all 128,000 lines of code for Photoshop 1.0.1, all coded by Knoll himself. If you are into such things, check it out.