Here's how I set up my Colour Settings. When you first start Photoshop after installation, you are given the option to configure these or you can access this window from Edit>Color Settings. This is the save in PS7, PS CS and (as far as I can remember PS6).

When you are configuring color settings, more information about each setting will appear in the descriptions box at the bottom of the window - just hover the cursor over a settings. For more discussion of why I have chosen these settings, click on a section of the screenshot.

For more about colour management, take a look at CMS for Beginners and the assorted links on Colour Management.