Get your images
In order to create a good panorama, you'll need a series of images that overlap. The best way to create these pictures is by using a tripod, because you'll want to keep your camera level and steady. If you don't have a tripod though, don't worry. Photoshop's tool still does a good job as long as you overlap enough of each consecutive image to give it enough area to match up.
To get started, find a good scenic spot and attach your camera to your tripod. Before you start taking pictures, it's good to plan out your shot. Point the camera all the way to the left side of your scene, look through the viewfinder, and notice where the right most edge of the image is. Pick some object on the right side of the frame that you'll remember, and take your picture. Then move the camera to the right until the object that was on the right edge is now on the left edge. Take your next picture, doing the same thing. Keep repeating this process until you've captured the entire scene, from left to right. And don't forget to keep your camera level, only moving it side to side, not up and down.
When you've got your series of images, it's time to fire up Photoshop CS3 (or Photoshop Elements) and make your panorama.