Skitch is an awesome iPad annotation application. It allows you to mark up and save pictures, add text, take pictures, and add voice. It is so easy to use, and so flexible, you'll absolutely love it. You can bring your picture in from just about anywhere - your photos, the camera, the web, a map, etc.
One of the other features that I just love, is that Skitch was purchased by Evernote. Evernote is one of my favorite applications and Skitch will save directly into your Evernote account. Skitch also sends to Twitter, an email, or into your photos folder. Take a picture, mark it up, and send it to a friend or your students.
In the photo collage below, you will see many different features right at your fingertips.