create an applet for web where one could take
two images, set one as the background, then insert another image on top. Would like to be able to resize and reposition the top image while over the
background image and when the positioning and sizing is just right I'd like to merge the two to create a single image based on the users actions.

Here's a sample if an existing application:
http://clickimprint.com/pages/userlogin.php

Run the demo and see how it works