GIMP is a powerful image manipulation tool. Version 2.4 has just been released and having used this for a while, thought it was worth a mention here. GIMP is a free and open source alternative to Photoshop or Paint Shop Pro and is used for photo retouching, image composition and image authoring. It supports all the usual file formats and in case you were wondering, GIMP is an acronym for GNU Image Manipulation Program.
Put GIMP alongside InkScape, the open source vector drawing tool, and you have quite a powerful set of design tools.
GIMP can be compiled for various platforms, but a Windows installer is maintained on a separate site.