In any discussion of type and text in Photoshop, it's important to keep one key concept in mind: Photoshop is an image editing program, not a page layout or illustration program, nor is it a word processor. As such, don't think of Photoshop's type handling capabilities as lacking, but instead rejoice that we have them at all.
Until version 5's type layers, there really wasn't "type" in Photoshop. Rather, we created masks (selections) in the shape of characters and filled with color. You couldn't edit the text later, and it printed as pixels. Photoshop 6 added vector type, which improved output to PostScript devices, such as laser printers and imagesetters. Photoshop 7 adds a few more features. (Despite these important improvements over the past several releases of Photoshop, if you need to add lots of text or very small type to a project, it may not be the best choice. Consider Adobe InDesign or PageMaker, or perhaps Illustrator, as an alternative.)
There are numerous advantages to vector type. For example, when printed with a PostScript output device, the edges remain crisp and clean, without the so-called jaggies - the visible stair-step edges of pixels along a curve. Vector artwork can be scaled in an illustration program or by a PostScript printer and still retain those high-quality edges. Because it consists of mathematically defined paths, it can also be manipulated in ways impossible with raster art.

The primary advantage of raster art is its capability of reproducing fine transitions and gradations in color. Because type is usually a single color, that is not of particular value. However, Photoshop's vector type can be rasterized whenever necessary.
The difference between vector and rasterized type is primarily of importance during the creation process and when preparing artwork for placement in a page layout program. In most other circumstances, the type is automatically rasterized. Remember that with the exception of scalable vector graphics (SVG), a format that is not supported by Photoshop, Web artwork is raster (including any text incorporated into the images). Likewise, inkjet printers don't take advantage of vector type. (Only PostScript printers can actually work with vectors as such.) When outputting to an inkjet printer, saving images for the Web, or using a non-PostScript file format, type is automatically rasterized. This doesn't mean, however, that you want to rasterize the type manually. Instead, leave it as vector in your original document so that it can be edited, and let the printer's software rasterize upon output.
In Photoshop, the PostScript file formats (those that support vectors) are limited to Photoshop (.psd), Encapsulated PostScript (.eps), Portable Document Format (.pdf), and Desktop Color Separations (.dcs). The enhanced TIFF file format can also support vector type layers, but full implementation of the format's advanced features outside Photoshop is virtually nonexistent.
NOTE: EPS, PDF, and DCS support vector type when saving from Photoshop. However, re-opening any of these image formats in Photoshop results in rasterization. After you save a file with vector text in one of these formats, don't reopen it in Photoshop. It's a good idea to keep the original in Photoshop's own .psd format.
When saving in a format that can maintain vector artwork or type, you'll need to ensure that the Include Vector Data option is selected. You'll see check boxes in the various PostScript file format options. While both the EPS and the DCS option dialog boxes warn about reopening files in Photoshop, but the PDF dialog box does not.
Another advantage of using vector type in Photoshop 7 and 6 is type warping. Clicking the Warp Type button in the Options Bar allows you to choose from a variety of pre-set (yet customizable) type distortion options.

Type warping in Photoshop should not be confused with type-on-a-path in Illustrator, nor with Illustrator 10's Envelope Distort feature. Both of these capabilities offer far more control over vector type manipulation.





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