I have spent nearly two years now setting up a "digital darkroom", and I can summarize my experience briefly as follows:
Don't use Windows 98 because it doesn't show thumbnails in file icon displays, and doesn't offer a choice for "open with..." when you right click on files.
Don't use Windows Me because it is REALLY slow. Somehow after it has been running for a few minutes, and especially after you access the Internet, the CPU gets really busy with unknown tasks and the applications like Photoshop become REALLY slow. I wasted two months trying to work out what was wrong, and then gave up.
All my speed troubles went away when I started using Windows 2000 Professional. This is a very reliable and fast operating system. You can right click a files and select "open with.." to choose which application to use. You get thumbnails of your images in the folder display. Windows XP is probably similar but I haven't tried it yet.
Use Photoshop 6.0 or 7.0 because the other image editing programs cannot handle "colour management". I struggled for five months trying to make the printer output look like the image on the screen, and then found that all my troubles went away when I gave up on the cheaper image editing programs and started using Photoshop. There are excellent tutorials about how to use Photoshop at
http://www.computer-darkroom.com .
You must use a "monitor profiling" system for your computer monitor. I use a program which came with my Samsung LCD monitor, and it works well enough for me. Search on Google for "monitor profiling" and you'll get good information about it. Monitor profiling allows your system to know how your computer's monitor shows the colours in relation to the RGB values in an image file.
You need at least one gigabyte of RAM to use Photoshop efficiently. I scan a lot of medium format images nowadays, and find that 2 GB is even better.
A fast CPU is needed to handle the "instant preview" of adjustments in Photoshop. I use a dual Pentium III 1 GHz motherboard (Asus CUV4X-D). Actually, the sheer speed of the processing doesn't increase much when using two CPUs, but the ability to run other programs concurrently with Photoshop improves a lot with two CPUs. Dual CPUs makes your PC like a truck capable of heavy loads rather than like a Ferrari with double top speed. This mother board has four slots for RAM, and with 512MB SIMM cards, I got 2 GB RAM on the board.
After a few months of scanning many photos, you'll end up with a lot of big files which would be disastrous to lose. So I use a "I Will" PCI RAID adaptor for IDE HDD. I have two 40GB HDD in parallel (mirror) RAID1 configuration on this adaptor. That way, if a hard drive fails, I don't lose all my files.
I also use special "silent" power supply and CPU fans because the noise of a PC is really disturbing when you do long hours of image editing. See
http://www.quietpc.com .
I hope this information helps someone.