Basically, you shoot as many overlapping images as it takes to cover the area you want. I then turn over my batch to Photoshop CS, which does quite a good job of stitching them together. Once you have a single image, you can then go on to do color corrections, etc. Here's the finished result of my first ever panorama:
click to enlarge, or see it on Flickr
I mostly did this as an exercise to help me learn what to do and what not to do while shooting; I realize I could have found a FAR better vantage point so as to avoid having random tops of houses and trees in the shot. Also, I apologize for the relatively low resolution. The full-res file is approximately 92 megabytes, which would use up all of my remaining upload space for December on Flickr.
Next time I post about panoramas, I'll include a specific tutorial on how I create mine. But if you already have some sitting on your harddrive, feel free to post links!