PDFCreator

Install PDFCreator from PDFCreator at Sourceforge. This installs a printer driver which lets you print anything to a PNG image. PNG (Portable Network Graphics) is a lossless image compression method so that the printed image can be edited as many times as needed without loss of quality.

Prepare your image as a Powerpoint slide. Use Powerpoint to add labels and arrows. Print the Powerpoint slide as a PNG image using PDFCreator. Click 'Save' at the first Window. The title and author specified here is not important. Select PNG as the 'Save as type' in the next window and type in a filename. Usually temp.png works well.

PDFCreator should automatically open up the PNG in an editing program (usally Microsoft Office Picture Manager). You can now crop the image to remove white space. Save the image. Insert the image into your Word document.