Gimp is an open source image editing package. It is probably not as powerful as Adobe's Photoshop but it includes more than enough features to fulfill my graphics needs and it is completely free.
Version 2.4 has been released. A Windows installer is also available.
People who can't get used to the quirks of the Gimp user interface might want to take a look at Paint.NET, a more traditional Windows graphics tool (but just as free).