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!