The Tech Tray weblog has posted a tutorial for hiding secret files inside JPEG images using the popular Windows archiver, WinRAR, and a little command line magic.
Basically, you create a .rar archive of your to-be-hidden file, then run a copy command from the Windows command line (with the /b binary switch) to embed your secret file in your image. After you complete the process, you can open and view the JPEG like any other image - the only thing that might tip off that the image has got a secret is a potentially bloated file size. To grab the secret file, you just use WinRAR to extract the file from the image.
It may sound like a lot of work, but it's a pretty simple process (watch the video to see how easy it is). This is a neat trick, but if you want to get really serious about encryption, you'll want to encrypt your data with TrueCrypt.