You can make do with Word. IME, you'll be spending more time fighting Word to get it to do what you want than you will doing what you want, but you can make do. Word 2007 can Save As PDF (you may have to download a free add-in from Microsoft first), or (if you don't have Word 2007 or want to check out other options) there are other free PDF "printer" programs out there that will do the trick.
Let me recommend the following for inserting graphics: use a single-cell table, set Text Wrapping to Around, make sure the left and right cell margins are 0.08", and line it up against either the left or right margin. Paste your graphic in the table and make sure Text Wrapping is set "In Line with Text."
The table procedure has always been, for me, the easiest way to get a graphic to stay more or less in place in Microsoft Word. There are more stable ways, but they are one or more orders of magnitude more difficult and unwieldy.
As far as the actual writing, IME, you need to first seize control of Word through the AutoCorrect dialog box... most of the options in the "AutoFormat" and "AutoFormat as You Type" tabs should be turned off. (In Word 2007, go to Word Options > Proofing.) After you've done that, you should be able to boss Word around more easily, including (drumroll)....
Paragraph Styles.
Seriously, they're that important. Trying to reformat a document where every paragraph style is Normal + (local formatting) is a hair-pulling nightmare. You'll thank yourself later.
Some links that might be handy now or later:
Microsoft Word Help at www.ShaunaKelly.com
http://word.mvps.org/ (most helpful for versions earlier than 2007)
Word2007.Tips.Net - Powerful tips on using Microsoft Word 2007 or
Microsoft Word Tips - Word.Tips.Net
[EDIT] Leaving aside graphics production/editing/whatever, all my work for EN Publishing is accomplished with Word and Adobe InDesign. In my day job I am generally required to stick with Word from beginning to end. [/EDIT]
HTH. HAND.