You are correct. Many people upload their photographs in low resolution (ie. few pixels) to stop others from downloading them and using themselves. This is a breach of copyright and most take a very dim view of it.
A lot of web images are low resolution and when you layer your own images on to them it really shows up. I sometimes mess around and add DD and her friends heartthrobs into images for a laugh, but haven't made any decent ones. The other option is to resize your own images before adding them, but then you wouldn't get a high quality image.
I want to use them in layers on Photoshop to make personal photographs 'fantasy' ones. Nothing weird just whimsical! Also relaxing on a beach in a tropical paradise instead of Bognor for my holiday snaps. (just joking)
I have found morguephoto which looks pretty ok and Flickr has a few unrestricted photos.