Getting the Images
Find a Place
The first thing you need to do is find a good place to make a panorama. The best looking panoramas come from clearings with interesting terrain surrounding them. Choose the highest point as the camera to take the screenshots from, so that you have a clear view without any close objects in the way. In Outland and Northrend, this is easy to satisfy due to being able to use flying mounts.
Taking the Screenshots
In order to make a good panoramic image, the player's character cannot be in any of the screenshots. PanoShot knows how to hide the user interface for you, however it doesn't know how to go into first person view for you, so you'll need to do that before running it.
Once you are in first person view, position the camera so that the material you want to capture is in the center of the screen vertically. It doesn't matter where you are on the horizontal axis however.
After the camera is in first person view, use the /panoshot command. As it is just a normal slash command, you could put it in a macro if you really desired.
As PanoShot is simply taking screenshots, you will be able to find the individual images in your Screenshots directory (inside wherever your World of Warcraft directory is).
Stitching the Panoramic Image
One of the easiest programs to use that stitch images together to create a panoramic image is Autostitch. The program exists as a simple single executable.
Start up Autostitch, and go to Edit->Options to set a few options. In particular, you might as well set the amount of memory to whatever your system has, and increase the image quality of the jpeg output.
Make sure the Auto Straighten and Auto Crop options are enabled. You can also set the size of the output image if you would like.
These options are not saved when you exit, so if you want to use the same options again later after restarting Autostitch, you will have to change them again.
Generating the Image
If you have World of Warcraft set to output images as tga still, you will first need to convert them to jpeg, using a program such as Ifranview.
To generate the panoramic image, go to the File->Open menu item. An Open dialog box will be shown, which will let you select all images at once that you will be using in the image. Select the 16 screenshots (17 are actually generated, but you only need 16 of them at most) you will be using by shift or ctrl clicking the images. When you have selected all the images you need, click the open button.
When the image has been generated, whichever program is associated with jpeg images will be opened with the panoramic image.
Processing the Image
At this point you now have a panoramic image. However, there are a few "defects" still remaining, as the image is probably a little blurry and probably has a (usually small) black border on the top and bottom.
These instructions pertain specifically to the GIMP, a free image processing program. You should be able to perform these operations with Adobe Photoshop, or maybe even Ifranview, however you'll have to figure out exactly how to do it on your own.
Cropping the image
Either use the crop tool, or use the select tool and then use the Crop to Selection operation under the Image menu. Make sure to at least remove the black borders, but if you care about less of the image, crop until you only have as much as you need.
Resizing the image (if needed)
Due to these images being used as the top banner on this site, the images (in my case) need to be 96 pixels tall. To resize an image, use the Scale Image operation under the Image menu.
Sharpening the Image
The images usually turn out a little blurry, especially after resizing. GIMP has two filters than can help with this, Sharpen and Unsharpen Mask. The Unsharpen Mask is more powerful, and can be found under Filters->Enhance->Unsharpen Mask.
Finding good values takes a bit of trial and error, so play with the numbers until the preview looks like how you want it. When it looks right, click the OK button.
Unfortunately, the Unsharpen Mask operation seems to ruin the seamlessness a little bit. You may want to try using Make Seamless (Filters->Map->Make Seamless), which might work, or "rotate" the image as described below, and blur the seam a little. Alternately, the Sharpen filter does not seem to cause a seam.