Quoted from my post on the official forums:
Actually, I used several completely free programs to do those.
I used GIMP (available at
http://www.gimp.org/ ) to edit the original picture of Slouken onto a blue background and make the WoW images SLIGHTLY more like him (only the gnome was edited).
I then used SmartMorph from
http://meesoft.logicnet.dk/SmartMorph/ to make the images morph. There's a new program that replaces smartmorph, but I still use the old one..