For quite a long time, computer security was a rather narrow field of study that was populated mainly by theoretical computer scientists, electrical engineers, and applied mathematicians. Data hiding techniques have taken important role with the rapid growth of intensive transfer of multimedia content and secret communications. There are many techniques used for data hiding and the well-known technique is the Steganography. Steganography is the art of hiding information in ways that prevent detection. For hiding secret information in images, there exists a large variety of Steganography techniques, some are more complex than others and all of them have respective strong and weak points. In this paper deals with encrypt and hide image in another gray image file using Least Significant Bit (LSB) based Steganography and Arnold's transformation algorithm based Cryptography. Experimental results show that the algorithm has good security and imperceptibility in grayscale images.