paint works but i would suggest using a specialized sprite editor.
For Mac osx there is a great freeware app called Pixen.
For PC the first program that comes to mind is Tilesetmaker http://www.geocities.com/kzsite2/
The only other one I know of is sprite builder it's nice but not freeware.
If you use adobe photoshop I have a script that turns a multi layered animation into a sprite sheet. Pretty handy as it saves you laying out the frames by hand.
(To make an animates sprite you need a sprite sheet with all the frames on it then use make animated sprite command which will cut the image up into the frames and let you play, stop....etc)