Sketchinz (http://www.sketchinz.com/), is a nifty little program for the iPhone or iPod Touch that allows you to draw pictures "free-hand." I drew the picture of the rabbit on the left.
Before you think that I'm such a great artist, there is an option to pull up a photo from your photo album that you can essentially trace (which is what I did).
Instead of using your finger to draw as you might assume (as I did), you tilt the phone to move this cross-hair like cursor around on the screen. You pick the current color to draw in and the current brush. Want to move somewhere else without drawing a line? Just pick the brush at the end (which is basically no brush)!
The colors are limited. You only have one hour to draw a picture (which sounds like a lot but if you are really trying to do something it goes by in a flash).
You can save your pictures, but it doesn't save them to your photo album. You can upload your creations to their server so others can enjoy them. They seem to have some sort of drawing contest always going which is cool.
One neat thing it can do is re-draw the picture just like you did it. It sort of has an animated quality to it.
It is a bit limiting but I still think it's worth the price. I find it fun to play with. Price when I got it: $1.99