The biggest differences are in interface design. Once you load a photo from your camera roll, you see nothing but a row of six icons across the bottom of the screen. These access the different editing sections. Press one and up pops a row of big, finger-friendly icons for special effects, image tweaks and adjustments, metadata, cropping and history.
All of these are presented like the magnified Mac OS X dock: as you scroll through, the central icons grow bigger and labels show above them. And once all the icons have scrolled across, they wrap around and come back in as if they were on a wheel. This makes it quick to navigate.
Hit the button and you are taken to the relevant controls. Everything is a lot smoother than it was in the previous version.
Under the hood, a lot has changed. That speed is everywhere, and renders of effects happen almost immediately. You can also work in full-resolution, zooming 1:1 with a double tap, and things like the crop tool and curves dialog have been made easier to use with the fingers.
Biggest of all, though, is the addition of layers. And not just any layers. You can pick blending modes, adjust opacity and even add layer masks. Coupled with a stylus, this last makes a very powerful tool.
Finally, an iOS image editor wouldn't be complete without retro-style film effects. While you get a lot of built-in effects, you can also opt for the $2 in-app purchase of Pop!Cam, a whole new set of FX which emulate films, add filters, simulate flash effects and even adds frames and grungy paper backgrounds. You can test many of these out before buying, too.
Right now, PhotoForge 2 is $2. If you haven't already, go get it now. You'll get $2 worth of entertainment out of it in the first ten minutes.
PhotoForge2 [iTunes]