You can choose a background from those provided or use something that is already on your camera roll. Bring up a picture, then use your finger to trace around an object and the image will be dropped in front the background photo. Chances are you won't be perfectly accurate with your selection, so there are different erasers you can use to clean up unwanted pixels. You can adjust the location, zoom, pan or rotation of the image.
Your finished image can be shared on Facebook, Twitter or emailed to a friend. There are 40 backgrounds such as Paris, the Taj Mahal and desert scenes, as well as bad weather and historic landmarks. If those aren't enough, there are links to some public domain images or you can spend US$0.99 for some humorous backgrounds. As of now, you're limited to one insert, but a future update will add the ability to use multiple images.
The only criticism I have is that when you are doing fine erasing, your finger covers the spot you are trying to work with. It might be better to let you click on the edge of the image while the eraser is offset from where you want it to be. With a little practice, it's easy to use the current tools; and there is a handy undo feature, which you are sure to use as you become proficient.
Cut Me In is a great little app for free, and if you enjoy manipulating photos while away from your computer, it's certainly worth the download. The app is not universal, but it can run on an iPad. It requires iOS 4.0 or later.