Sketchcast is a very versatile site to use with students. It is much like a screencapture service but you can also "sketch" .
Russell Stannard has a full tutorial here.
Other drawing applications are:
Scribblar. I highly recommend it for meeting up with students and using its online whiteboard. This link is to our Pro room that is freely available to the public.
Odopod: They offer a free "whiteboard" for sketching. Very attractive and easy to use. Many colors. Also, see their slideshow of the best drawings made by others around the world.
Scriblink / Dabbleboard and Skrbl are other new options that you should check out.
Scribble Maps: this site allows you to use Google Maps and scribble / draw! Very handy and unique.
And don't forget the amazing "Draw My Thing". A real time pictionary game where you participate!