Ahhh, I don't use CS3 so I'm not sure - hehe. :) Maybe whenever you're selecting a channel and you click back to your normal layer, it puts you into the layer mask mode. I imagine you can just click out of it at the bottom of your toolbar if that's the case (the button is a rectangle with a circle in the middle, looks kind of like a camera).
Another tip for the gradient thing I mentioned:
1. It's possible to "erase" your steps in Photoshop by using the history tool. After you've cleared the image, if you feel like the center has been softened too much, you can bring some of it back.
Say you've cleared the area around the image and it looks like this, but you want the center to be more clear:
First you have to check the place you want the history tool to "go back" to. Go to your History tab and check the box BEFORE you hit clear. That means everywhere that you sweep your history brush, it will reverse the image back to the state it was in before you hit clear.
Select the History brush from the tool bar. I recommend picking a big fuzzy brush with soft blurry edges. Click in the center of your image where you want the image to be "un-deleted".
You'll then end up with something more like this:
Another idea would be to drop the gradient tool all together and try this:
Go to the channels tab and make a new channel, except this time instead of using the gradient tool - use the circle selection tool. Make a circle in the center of your image (while you're making your circle your can hold down "shift" to make it a perfect circle, or you can hold down "space" to move it). Go to Edit -> Fill -> and for the fill color select white. You'll have a channel with a plain circle like this:
Go to Filter -> Blur -> Gaussian Blur and drag the slider up the how much you'd like the edges to be fuzzed out. You could also try doing a Filter -> Blur -> Radial Blur, and check the zoom option. In this case I did both and ended up with this:
Follow the same steps as before (select/invert/delete/etc), and you image will look like this:
