Smart Objects were introduced in CS2. Smart Filters, which are an order of magnitude cooler still, were introduced in CS3.

And for those who are curious, significant new features of CS4 include the ability to rotate the canvas (much like Corel Painter), content-aware scaling, some minor 3d function, 64-bit support, and OpenGL display acceleration. Handy, but not as big a deal as the Smart Objects/Filters.

Improvements in CS1 were negligible: Real-time histogram, the lens blur filter, Javascript support, and a much-improved Camera RAW utility. So if upgrading from PS7, definitely skip CS1.