Just my 2p's worth:
Freeware image
editors don't get a lot better than the GIMP (esp for photos) now in V2.0 form and a lot more PC friendly than it was before.
VuPaint (still free I think) is pretty good for creating gfx from scratch.
Don't have the URL to hand but a simple search will find it - look for the precompiled for windows binaries unless you are a masochist who wants to compile his own...
If you are buying, best value all rounder IMHO (and from personal experience not second hand) is JASC Paint Shop Pro V8.1 - vector/raster good photo editing, scriptable - lots of graphics power for not a lot of money at all (compared to Adobe & Macromedia's offerings.)
Think there was a freebie of PSP V5 given away on a UK mag not long ago - when V8 came out. V5 is actually still very useful and for free it has to be worth looking out.
Al (MaDbRiT)