Suddenly cannot place image or resize file without losing resolution quality. Is this a bug?

I have CS3 and have been using Photoshop for several years. Today I randomly encountered a problem I have never had before.
I created a new file, 468 x 60 pixels with a resolution of 200. I then placed a file of a 4.95MB photo in this file. The size of the photo is quite large (resolution also 200)  and I should have had to resize it way down to fit in small 468 x 60 space I had.
Instead, it placed the photo as a much smaller image, almost like a thumbnail of the original. When I went to resize the photo to make it larger, the resolution was terrible.
So then I went to the original file of the photo, copied it, went back to the 468 x 60 file and pasted it. It pasted it as the true size, but when I decreased the size, the resolution went bad. How does that even make sense?
So then I went back to the original file of the photo again and resized it down from there. The resolution went downhill again!
I have tried this with multiple other photos and file sizes and dimensions. I cannot place any large photo file and keep its accurate dimensions/resolutions. I also cannot resize any photo down without losing pixel quality.
The only thing weird that showed up right at the beginning of this whole process was that the pixel aspect ratio window kept popping up even before I'd open a file (it has been set to square).
I have reset all PS preferences through ctrl-alt-shift. I have gone through the Adobe update process. I have done disk clean-up and cleared off nearly 10GB of room on my hard drive. I have restarted over and over. I have also tried this process in Illustrator and had no problems.
Is this a bug? A memory problem? Never have I run into this issue before and I feel like I'm going crazy!

You could make the top layer active and then Cmd-Shift-Option-E
(stamp visible).
Do the trim and crop and then delete the top layer afterwords.
MTSTUNER

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