Read this great how-to article on generating a fantasy world in Adobe Photoshop. Constantin Potorac leads you through, step-by-step, as you follow along and create a fantastic scene, beginning with basic stock images. Combine stock images of a background, tree, and model. Transform the background into a magical wonderland, add atmosphere with cloud effects, and birds to give it life. Edit the image of the model to blend in with the background - add some elegance to her dress and hair, with fantastical details. Add more effects to make her skin stand out. Add wings - after all, it's a fantasy world, right? Add a flower in her hair for a delicate touch. And then after you're done with that, play around with the colors of the entire image to give enhance the dreamy effect. You'll be amazed at what you can accomplish!
Go read this article on creating a fantasy world in Adobe CS5!