Before trying to create a panorama photo in Adobe Photoshop CS 3, you need to know the following:
- images should be taken properly in order to produce the best results;
- use a tripod or a sturdy surface to position the camera;
- stay in the same position, because the photos need to have the same viewpoint;
- overlap images by 25-40% but not more in order to be able to use the automatic photomerge settings
- use the manual exposure.
Now, let's merge two images.
Here are the source images:

Fig 1 Source image 1

Fig 2 Source Image 2
Click on: File->Automate->Photomerge.
Fig 3 Go to Photomerge
Now choose the source images and then choose one of the layouts:
- Auto: Photoshop will analyze the source images and and choose the layout
- Perspective: one image will be used as source and the other will be repositioned to suit the final image
- Cylindrical: displays photos as an unfolded cylinder and is used for creating a wide panorama.
- Reposition Only: aligns the layers but doesn't transform the image
- Interactive Layout: position the images manually , recommended for advanced users.
In our example, we chose the Perspective layout.

Fig 4 Choose the photos and the layout
And here is the result:

fig 5 The two source images combined