It hardly looks like an image that shook the world. But this photograph, taken in 1987 by John Knoll, could be as central to the modern visual vernacular as Eadweard Muybridge's shots of galloping horses or the first use of perspective.

Its subject is Knoll's then-girlfriend Jennifer, topless on the beach in Bora Bora, gazing out at To'opua island. The young couple worked together at Industrial Light & Magic, Lucasfilm's special-effects company, and were enjoying some well-earned R&R after working 70-hour weeks on the film Who Framed Roger Rabbit. Looking back, Jennifer says: "It was a truly magical time for us. My husband actually proposed to me later on in the day, probably just after that photo." Little wonder that John would name the photo Jennifer in Paradise.

But the image was to become much more than a record of a perfect moment. At ILM, Knoll had encountered a cutting-edge piece of hardware known as the Pixar Image Computer, one of the first that could be used to manipulate images. "I thought it was amazing," he says. "The fact that you could take an image from film, scan it in and turn it into digits and then manipulate those numbers and put it back out on to piece of film – it meant that there was literally no limit to what you could do to it in the middle."

The Pixar machine cost hundreds of thousands of dollars and the image-processing software was so complex it required a specially trained operator. So Knoll was somewhat taken aback when he visited his brother Thomas, who was reading for a doctorate in computer vision at the University of Michigan, and discovered that he'd developed some similar software that could run on a much cheaper Macintosh Plus. Knoll began to chivvy his brother into pushing the application further. "It was really just a hobby at first," he says, "but I kept asking him to add more features."

Eventually they had something that John believed they could sell. The only problem was, with so few digital images available at the time, it was hard to demonstrate what their new application could do. Visiting friends at Apple's Advanced Technology Group lab, Knoll took the opportunity to use one of their flatbed scanners, also rare devices then. The only picture he had to hand was that 6in x 4in print of his wife in Tahiti.

In this way, Jennifer in Paradise became the first colour image used to demonstrate the software they had started to call Photoshop.

"It was a good image to do demos with," Knoll recalls. "It was pleasing to look at and there were a whole bunch of things you could do with that image technically." And maybe there was something in it that hinted at the kind of more perfect world that Photoshop might reveal. Knoll would leave a copy of the software in a package including the picture at the companies he'd visited. Often he'd return to find that the programmers had cloned his wife.

To celebrate Photoshop's anniversary, Knoll revisited these early demos in a YouTube video.

Reading on mobile? Watch John Knoll recreate an early Photoshop demo

The idea captured the interest of Dutch artist Constant Dullaart, who rebuilt the picture from screenshots of the video and made it the centrepiece of his new London show, Stringendo, Vanishing Mediators. "Given its cultural significance," he says, "just from an anthropological point of view I thought it would be interesting to examine what values the image contains. The fact that it's a white lady, topless, anonymous, facing away from the camera. And that it was his wife. He offers her, objectifying her, in his creation for the reproduction of reality."

Dullaart's work seeks to expose the technological structures that inform modern visual culture. For him Jennifer in Paradise is a key artefact, the original Photoshop meme. As such, he believes, it belongs in the public domain. His misappropriation of it is a protest.

John Knoll seems unconvinced. "I don't even understand what he's doing," he says, bristling at the idea of the image being reconstructed without permission (ironically using Photoshop).

Jennifer is more sanguine. "The beauty of the internet is that people can take things, and do what they want with them, to project what they want or feel," she says.

Dullaart's reverence for the picture may be extreme, but it is hard to overstate Photoshop's importance. David Hockney, who was invited to test the program soon after its release, predicted that it would spell the end of film photography. And although, as Knoll is quick to point out, photos were being altered long ago in Soviet Russia, it was only Photoshop that democratised that ability. In a way Jennifer was the last person to sit on solid ground, gazing out into an infinitely fluid sea of zeros and ones, the last woman to inhabit a world where the camera never lied.

John Knoll, now chief creative officer at Industrial Light & Magic, is proud of the impact that Photoshop has had on the world. "Any tool can be used for good or bad," he says. "It's really the ethics of the artist using it."

Asked about Dullaart's dream of taking her and her husband back to Bora Bora to recreate the picture, Jennifer laughs. "Oh no, no, no." she says. "That's not OK."

• Constant Dullaart: Stringendo, Vanishing Mediators is at Carroll/Fletcher, London W1, until 31 July