Note

 
All application names & icons link to their page at AppShopper.com, a brilliant free app directory service that is much easier to browse than the iTunes AppStore.

You can also create an (anonymous) account there, which enables you to automatically keep track of the apps you want or own and get informed about price changes and updates. Saved me lots of money already!

They also have helpful rankings of all categories and consolidated lists of what's new or on discount. Check it out!

All links will open in a new window or tab.

Graphic Applications

I didn't expect the iPhone to be such a strong graphic tool, but some of the applications below made me use the iPhone's crappy camera more than my expensive real one. It's just fantastic being able to make a photo, clean it up, apply some effects and do a proper composition before publishing it online straight away! Some high-end professional apps here, plus some easy fun ones too...
ProCamera is the best replacement for the built in camera I could find. It features an anti-shake stabilizer, a timed(0.5-20sec) and full screen smart trigger, 5x digital zoom in full-resolution, several arrangement guides, virtual horizon, full-size photo-sharing and basic editing functionality. On the iPhone 3GS it also features high quality video recording, manual focus & exposure and a photo compass. All in one app!
PhotoForge can be used for image manipulation, retouching, effects, and color correction, as well as a painter’s tool. It allows you to put together an image, combining filters, brushes, and effects, which can be layered to produce even more dynamic results. If you buy just one photo editing application, this is the one! If you are a bit more professional or playful, also consider the next.
Photo fx is the definitive set of digital optical filters for the iPhone. Simulations of many popular award-winning Tiffen glass filters, optical lab processes and photographic effects (67 exciting filters, containing 780 presets, organised in 9 different groups) will help you create stunning images, whether you are an amateur or professional photographer. Definitely the most comprehensive, feature rich photo app available. Photoshop in your pocket, basically!
FX Photo Studio is a slightly less professional app than the one above but features the broadest selection of photographic effects, including Vintage, Black and White, Night Vision, Pencil Paint, False Mirror, Ghost, Neon Light, Hue Green, Ripped Glass, Rainbow Palette, Scary Face, Ancient Canvas, Steamy Window, Stardust Frame, Mosaic, Burnt Paper, Explosion, Old Film Frame, Bump Mapping, Solarize, Tritone, Old Photo, Frost, Old TV and many many more!
Layers is a natural bitmap media painting app that allows you to add up to five layers to each drawing, opening a whole new creative space. You can add a layer from a photo to trace your subject, or use the eraser tool to remove parts of one layer and reveal details of the layer beneath! A full-featured eraser gives you fine grained control over layer transparency, and a smudge tool allows for tons of unique painting styles! Once you're done painting, you can export your drawing as an Adobe Photoshop file with layers intact. A free Mac companion application also lets you replay and re-save the design at a higher resolution than possible on the iPhone.
Paintbook 2.5 brings 100% vector based (!) natural media drawing, painting and sketching to the iPhone: no bitmap jaggies, infinite undo, infinite zoom, rotate paper to any angle, easy hue/shadow/ tone adjustment, 30 customizable colour pots, brushes from 0.1 to 100mm in width, round and square bristles, and much more. Images can be exported as PDFs to be edited in proper design applications like Adobe Illustrator, which turns this from a doodle app into a professional tool.
Face Melter PRO allows you to alter and distort images with simple and intuitive 1, 2 and 3 finger gestures. You can turn normal photos - e.g. portraits - into hilarious and fantastic looking artworks and caricatures. The Pro versions allows you to chain multiple deformations into unbelievable fluid animations (and send them straight to YouTube if you like). Lightens up the most boring party or meeting. VERY popular with children who particularly seem to love deforming their parents... ;-)
AutoStitch Panorama brings high-resolution, wide-angle photography to the iPhone. With state-of-the-art algorithms that automatically recognize overlapping images, AutoStitch will combine photos you make into seamless wide-angle panoramas or spectacular high-resolution images. Rivals dedicated high-end desktop applications and brings the iPhone's crappy camera to a whole new level.
Camera 3D Pro is the only 3D camera app that features an auto alignment mode with no manual operations required to create 3D pictures. It uses the iPhone's accelerometer to compensate different inclinations between left & right pictures and auto-corrects (and crops) vertical errors as well. It supports color and monocrome Anaglyph 3D (requiring red-cyan 3D glasses), Steroscopic 3D (parallel), Wigglegrams (simulated 3D) and the Carl Zeiss Cinemizer®. All images are saved in an internal album and can be re-rendered in any format to be exported. The basic app is free to try and extended functions are activated through an in-app purchase. Great!
Face Melter PRO allows you to alter and distort images with simple and intuitive 1, 2 and 3 finger gestures. You can turn normal photos - e.g. portraits - into hilarious and fantastic looking artworks and caricatures. The Pro versions allows you to chain multiple deformations into unbelievable fluid animations (and send them straight to YouTube if you like). Lightens up the most boring party or meeting. VERY popular with children who particularly seem to love deforming their parents... ;-)
Marbling is a similar tool for photo-animation and photo-editing, powered by a numerical simulation engine. Just by changing parameters a bit, you can enjoy various types of animations from liquid to elastic matters. You can also morph pictures into various shapes by dragging or double-clicking the pictures. Not as powerful as Face melter but listed anyway because it's free!
OldBooth is another favourite party app. Have you ever wondered what you or your friends would have looked like in another era? Take a snapshot, play with the over 60 masks and turn them into hilarious portraits. Silly but fun!
Framed (back to the fun apps) lets you drop your photo into a series of nearly 50 great scenes such as a wanted poster, billboard, TV, picture frame and more. Add your own text as well. Once you pick your picture, just swipe your finger and scroll through all of the scenes with your photo already applied! Send your photos to friends, save to your album, or post on Facebook -- all from within the application. Works FAST. Does not require a network connection, so you can personalize photos instantly anywhere!
PhotoFunia is a similar photo editing tool which is free but requires a WiFi or 3G/EDGE data connection to work. Just select an effect you like from over 100 different effects, select a picture from Camera Roll or take one with iPhone's built-in camera. PhotoFunia's technology automatically identifies the face in the photo and let's you create funny face photo montages. New effects (of surprisingly good quality) are being added every week.
MagCover is another application that let’s you insert any photo from the photo library or iPhone camera into templates. In this case you can choose from over 115 magazine covers, each with pre written contextual cover lines. Quick, cheap fun!