In reply to Phil79:
> What do people in the know use?
Freehand drawing with a mouse is quite hard. For best results you might want to consider a graphics tablet. They're relatively inexpensive unless you go for something high-end.
Decide whether you want to annoate at the level of rasters (pixels) or vectors (lines and shapes). Vectors resize better and can be edited independently of the underlying image. Raster annotations usually can't. Adobe Photoshop is best for raster images made up of pixels, and Illustator is vector-based. They'll both let you import an image and annotate it, though, but neither of them are free.
Inkscape is a decent free, vector-based pacakge but it can be fiddly to use.
Also, consider what kind of output you want to produce. Is this for publishing? Web or print?