Here are the 7 Dragon Balls scattered throughout the world in the game. Once you collect a Dragon Ball, it will be held in your "Key Items Bag" until it is needed later.
Once you collect all 7 Dragon Balls, you can take them to the Old man near Kami's Tower to summon Shenron (Lvl 60). After you summon him, you are allowed to catch him. Only hand in the DBs once you are ready to catch him, because you only have one chance to fight!