Okay, there's a couple ways to do this I think, but this is how I do it.
1. Open the image you want to be the background
2. Then, File>Open as layers and select the picture you want to be in front.
3. Go to Image> Add Alpha Channel
4. Click the eraser tool and erase the part of the top image (in my case, me and Roxy) that you want to be the background.
Don't forget to zoom in (the + button, or the - for zoom out. You might have to press shift depending on your keyboard.) and get the little details. I did a picture again. (I just like pictures) Pretend that I actually spent more than 30 seconds erasing, and I put the picture in the right spot. (Not in the middle, where the straight line stands out. Whoops!)
Oh, sorry! I forgot to include that... To make the image smaller, do Image>Fit to layers. (I think. I'm on my ipod so I don't have gimp in front of me.) And then for step three, I completely got that wrong... Sorry. It SHOULD be, Layers>Transparency>Add Alpha Channel. Now that should work. Sorry!!