I used WordFoto for iPhone. The process is a bit convoluted though as I use a PC. Here's a couple more.
The process was as follows: Start up Paint.Net (free) or some other simple editor. Blag artwork from Flax's brilliant vulgarpicture.com, resize it, crop it, save as JPG if not already saved as JPG. Fire up iTunes. Select the correct folder to Sync from on the computer, then Sync in to the iPhone, as you can't drag and drop from Windows. Once on the iPhone, start WordFoto, select the picture from the picture library, set up the word list for the photo, and convert. Once converted, save back in your picture roll. Close down iTunes. Now you CAN navigate to the picture roll on the iPhone from Windows, so bring the converted picture back. You'll find it's been tripled in size, so reduce in size, resave as an optimised JPG, and there you go. I use Tinypic to host my pictures.