Of course Highlight/Shadow has an effect on the quality of your images. It can make them better, more or less the same or make them worse, all depending on how you use filter. If your clients are noticing AND complaining about your images, then I'd probably take the hint and back off. The people who are paying are telling you it's too much.

When you say you can "see" the effect in Levels, I have to assume you mean that you can see a change in the Histogram display in the Levels dialog. The Histogram is just a map of the distribution of pixels within the image (or selection) and, yes, if you make a move that alters the tonality, then you will see a difference in the Histogram. The real question to ask is "Does the image look better or worse after I altered it?"

Instead of "messing" around with you images, consider learning how correct your images according to a plan - like setting highlight, shadow and midpoint pixel values as your first move before deciding what else might be needed.

If you edit an 8-bit-per-channel image,this will likely lead to a comb-like histogram with a slight loss of tonality values; then, technically, you can tell the photo has been tampered with (the same applies to any editing of the levels and/or curves etc. at 8 bit depth data). Whether or not this will actually show on your monitor or in the printed result is hard to predict. Technically better results can be expected if you edit an original at 16 bit depth per channel and reduce it to 8 bit only before you save the edited copy. Photoshop then applies some dithering that will yield a smoother histogram for those who care.

With the advent of ACR and it's non destructive editing, I generally dispense with the masking layer on a dupe, and use the history brush to make local corrections. If S/H is indicated, it's the first step upon exiting ACR into PS.

Over processed look is in the mind of the beholder. Generating B&W images at all is overprocessed, unless you are color blind.

I find the surprise that certain images exhibit with S/H interesting and useful on occasion. Well done, S/H always provides a dramatic alternative to the simple image, which one can employ or not, as desired.

It also helps to set a way different default for S/H as the defaults that come with PS are odious in the extreme for most images. Pick an image that has no blown highlights or heavily clipped shadows, apply the filter, move the sliders until you get what you want, then save it as a new default.

I don't set shadows and highlights in separate operations. Flattening the file after shadows are tweaked precludes the tradeoffs I find showing up when you do the highlights. That's why I have my defaults set differently than the Adobe defaults.

A photograph is meant to be seen and appreciated as any other well done, masterful object, whether sculpture, a weaving a painting and so on. The photograph's basic attraction, what makes a photograph a photograph, needs to be honored at the outset, but don't be afraid to "depart from reality", because you are creating a separate reality (no drugs needed! ).A photograph can sing, a piano can sing, but both need the master touch to do so.

I hoped that by CS5, S/H would have become an adjustment layer, not only for it's non-destructive qualities, but so we can revisit the settings later in processing.