I had mentioned Paint.NET earlier here, but now version 1.1 is released which has even more exciting features, of which I picked a few ones:

• New Effect: "RotoZoomer" which can perform arbitrary angle rotation, and zooming.
• Layer Properties now visually previews and updates all properties in real time without having to press the "Apply" button.
• Invert and Desature are put into the Image -> Adjustments menu, along with a new adjustment called "Brightness & Contrast."
• User interface upgraded to make full use of XP themes. In v1.0, many dropdown boxes and "updowns" had a Win2K/OfficeXP look to them.
• Extensibility! After you install the program, check out the "RotoZoomerSource.zip" for an example of how to write an Effect plugin. You will need Visual Studio 2003 .NET to write a new plugin. No other types of plugins are supported for v1.1.

Like last time, full source is provided too (which has lots of tweaks and refactorizations). Read more and download