That's Photoshop CS2.. I haven't even tried CS3 yet and there's already CS4! O_O
And.. oh.. that's a bit tougher to explain..
Basically, pen tool helps you create and manipulate line through anchor points (dots).
imagine a line
_,,,___
those commas are anchor points that would let you bend the two segments of the lines that are attached to it. That way, you can create curves and stuff that are more accurate than when you use a brush or a pencil.
After creating the lines you want, you have the option to:
a. use the line to select the area within the enclosed space of the lines, like for cutting out pictures or making those black iPod silhouettes you see everywhere these days
b. draw actual lines that follow the path of the line you created, like for...err.. drawing.. o_O
