offtopic - I've seen a number of blog posts using this hand drawn diagram style recently, does anyone happen to know how it's done? (answers other than "by hand" appreciated)
Correct. If you're going to try it, I recommend getting a stylus for your iPad, since handwriting with your fingertip doesn't work very well.
Pencil (by FiftyThree) works great, of course. And unlocks the additional features in the Paper app. I'm actually quite impressed by how well it works.