After choosing your starting point (a photo, screenshot, etc.), you can edit your creation using a number of built-in tools that take advantage of the iPad's touchscreen interface. Objects you draw on the screen can be moved around with your finger or pulled into the trash. A pencil tool lets you draw freehand. You can add text. And you can drag, pull and adjust other objects like arrows, circles, squares and lines.
None of this is entirely ground-breaking stuff, but Skitch does what it does very well. It's a pleasure to use.