Is there enough improvement in functionality in CS3 over CS1 to be worth spending money on it? I've been using both Photoshop CS1 and v7, and there are barely any differences to be seen, certainly not enough to be worth the upgrade fee. Granted, I am fairly inexperienced with Photoshop.

I agree with Rob. Check out Inkscape, and use the money you save to escape from PowerPoint. Go for a spin in MediaShout. You'll never want to touch PP again.