FWIW, I've been having CS3 stitching problems, too. Stitch failures, stitching with no blending, inability to save stitched result due to "not enough memory" notifications from CS3.
Dual-core with 3GB. If I reduce the memory load by degrading the source images (JPG) it sometimes solves the problems. Killing all other processes seems to help, too.
Mort54, what are your system specs?