I've been messing around with images and for some time I've been using a free program called "The Gimp" which can do useful things like layers and transparency. It can probably do lots of other tasks too, but it is such a pain to figure out how it works that I will never know.
For some time I've been looking for a decent free graphics editor which doesn't make me tear my hair out, and luckily I seem to have found one. Paint .NET started life as student project and now is a very well specified graphics editor which is great to use. It has a bunch of artistic effects as well as those features that I need to create images for the XNA games.
If you are after a good program to work with images, take a look here.