I've got into the habit of editing in 8 bit, since most of the menus in PS seemed to be disabled if you opened in 16bit
Considering for one moment that you have ininite space on your harddrive:
You should
always work with 16 bit files if possible.
Each colour image is made up of three colour channels. Each channel contains 8-bit grayscale information (2x2x2x2x2x2x2x2) defining the amount of each colour component making up the colour image. When the three colour channels are overlaid a single pixel in an RGB colour image contains 3x8-bits of information (256x256x256) which makes it a 24-bit colour image that can define up to 16.7 mio possible colours.
16 bit images contain 2x2x2x2x2x2x2x2x2x2x2x2x2x2x2x2= 65536 bits of information per channel so 65536x65536x65536 which gives us around 281 trillion possible colours- in short many more colours that with 8 bit depth. (For a longer explanation please see:
www.photoshopessentials.com/essentials/16-bit/)
Eventhough our eyes are incapable in seeing all this colours the information is nevertheless there and for adjusting your images etc. useful- avoids for instance to a great extent "toothed histograms" and is very useful for high definition images.
CS3 now supports 16bit editing to a wide extent (so no more greys in your application!)
Now next part of the question: which colour space?
Well this is debatable as all is...the "best" colour space is Adobe RGB (1998). Why? Well is has been establishes as the recommended RGB editing spave for RGB files that are destined to be converted to CMYK. It has a larger colour garmut that is particular suited for RGB to CMYK colour conversions. So here again work with the most information available if you can!
Tiff versus PSD:
It is probably cleat that only Photoshop, PDF and TIFF formats are capable of supporting all the Photoshop features such as vector masks and adjustment layers and layers in general. Saving in Photoshop format should result in a more compact files size except when you save a layered image with the "maximize backward compatibility" checked in preferences. Now Photoshop files have one serious advantage when you use a file in various Adobe applications at the same time (as I do as I work a lot with Premiere and Phtoshop) Now if I change an image in Photoshop that I also you in an editing programm that this file will automatically be changed in ALL Adobe applications- which is really useful. So in other words any changes in any Adobe Programm and save as a PS file will adjust the file automatically once opened in another Adobe application! REALLY useful!
Tiff files with lossless compressions take usually longer to open. Tiff is usually used when you distribute to someone else. They will usually ask you for flattening the file and removing all alpha channels as this could cause them problems.
To summarise all of the above: Adobe RGB (1998); 16 bit files and saving in PS format is the best for the time being. Once you send it to somebody else save it as a tiff file. Generally speaking- the bigger the better!
Hope this clarifies some questions- any more- feel free to ask...

Best
Dr. Stef. (yep- for all of you who don't know it yet- I passed my viva with distinction! For people who don't know me: Dr. Stef. for all my friends Dr. is enough hihi- as if I gave a damn about titles...)