Aim: To provide an updated overview of photodynamic therapy (PDT), emphasizing the evolution of photosensitizers, their mechanisms of action, and current challenges and innovations aimed at improving therapeutic outcomes. Methods: A structured literature review was conducted using PubMed, Scopus, and Embase databases to identify studies published between 2000 and 2025. Search terms included photodynamic therapy, photosensitizers, nanoparticles, reactive oxygen species, and drug delivery systems. Experimental studies, clinical trials, and review articles focused on photosensitizer development and applications were analyzed. Results: Photosensitizers have advanced through three generations. First-generation agents such as Photofrin demonstrated clinical success but were hindered by shallow tissue penetration and prolonged photosensitivity. Second-generation compounds achieved stronger absorption within the therapeutic window (650-800 nm) and higher singlet oxygen yields but encountered solubility and delivery limitations. Third-generation systems integrate targeting ligands or nanocarriers, improving selectivity, bioavailability, and pharmacokinetics. Despite these advances, PDT remains limited by insufficient light penetration, tumor hypoxia, and non-specific toxicity, and is therefore used only in select clinical settings. Recent approaches, such as multifunctional theranostic photosensitizers, gene-encoded PSs, and combination therapies with immunotherapy or chemotherapy, aim to overcome these barriers. Conclusions: Continued innovation in photosensitizer chemistry, nanotechnology-based delivery, and combination strategies promises to enhance PDT’s selectivity, depth, and clinical effectiveness across oncology, dermatology, and infectious disease treatment.