ToonPAINT
I have a new favorite iPhone app: ToonPAINT. The Creative Director at work showed it to me yesterday and I bought it immediately. It takes a photo and turns it into a cartoon. You can tweak the sketch effect, and then you can paint in sections if you want. Here are some that I made from photos I already had on my phone:

The app is fairly intuitive to use. The finger painting works much better than I expected. (It’s downright magical.) You can export your finished sketches in normal and high resolution. I’ve already used it to set my new Twitter avatar. You could also use it to make a really neat colouring book for your kids.