Raw files - iPhoto and Photoshop Elements

I am shooting raw files on a Canon 400D. They upload into iPhoto 6.0.6 ok but I can't open them in PE4.0.1 for editing. I can drag the .CR2 file onto the desktop but PE doesn't recognise it. Am I missing something or am I going about this the wrong way? So far as I can see, iPhoto and PE should both recognise .CR2 files.
Thank you for any help,
Geoff.

Also, you will need a more up to date version of ACR than the one that shipped with PE 4. Go to adobe's site and download the next-to-latest version of ACR (some problems with ACR 4.4 so I'd hold off on that and get 4.3.1):
http://www.adobe.com/support/downloads/product.jsp?product=40&platform=Macintosh

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