Well I used a point and shoot Canon for most of my photos in this shop, but I do use a Canon Rebel XT and Canon Rebel T1i for some of the other shops/projects I'm involved in. If you want to start small you can find a good used XT kit on eBay for around $300. I highly recommend the 50mm f/ 1.8 lens for around $100 - I have about 7 lenses and it is by far my favorite. You can also buy macro attachments for cheap on Amazon that screw on to the end of your lens.
As far as photoshop goes, I use both cs3 and cs5. I disagree that you need the latest version (cs5). I think if all you want it for is editing photos and making some graphics cs3, or even Photoshop Elements, will do just great. Some of my friends just use Picasa and Picnik to edit their photos using free tools.
The best way to go about it is to figure out what kind of budget you have for them and go from there, because you really can do a lot with just basic tools.
