Big Huge Labs is a site that's been around for awhile and very popular w/ the kids. It is where you can take picture templates w/ a piece cut out and add your very own.
"Rollip is a fun and easy way to create polaroids from your photos. This is ideal when wanting to print or download them. Plus, you can add a nice border around your photo too."
Picjoke is a site where you can have fun with photos by uploading them into entertaining templates. They are always adding new effects daily.