You might try the search option in these forums. It seems like I saw this question answered not too long ago. I'll try to find it as well, and if I do I'll post the link back here for you.
Make a rectangle selection by using the Rectangular Marquee Tool (M), make it five or six pixels smaller than the whole background area, click Select > Modify > Smooth then enter a value starting from 4 pixels (the more pixels you enter here, the more rounded your corners will be), click Ok. Now you should have rounded corners selection, you could copy this rounded corner rectangular and paste it in another image or simply press Ctrl+Shift+I to inverse the selection ,fill the now selected outside area with another color
/////// This is what I am not able to get the rounded-rectangular tool ( U). Mine is photoshop7, where to find this very tool?
/// After I click on rectangular Marquee Tool, go to select>Mofdify but I only get boarder and no smooth ( smooth shows grayed out). Now how to get >smooth here.
I'm fairly sure the rounded rectangle tool is in Photoshop 7 - although I might be mistaken (actually, I think I may have been using PS7 when writing this tut). Find something that looks like a Rectangle in your toolbar (or some kind of shape) and click and HOLD IT DOWN. The flyout menu should appear and then you can select the rounded rectangle: Let me know if that works.
If Smooth option is disabled, it's most probably that you have made a Rectangular just on the edge of your background, make your rectangular a few pixels aways from the edge, like the attached image.