What tools are you using to create sprites and animations for iphone games?

Well for spriting i always use photoshop, it does not matter for what platform your developping. Just pick your favorite package.

Agreed with the above -- there isn't anything about iOS that necessitates a particular graphics package for making your sprites, so you should be able to use anything you're comfortable making your sprites in. Have a search for spriting tutorials and older discussions on the topic, see what they use or recommend, and then try things out to see what works well for you.

If you want to make an animation, you can use any flash creating software like "Macromedia Flash MX 2004" and "Adobe Flash Professional CS5.5".

If you want to make games, there are a lot of softwares and tools.
One of the tools is the XNA Game making studio, you can use this with C# to make games for IPhone/XBox/Playstation3/PC/Android.
Adobe Flash Professional CS5.5 can also be used to create games for IPhone, but it requires experience in the AC3 programming language.

Flash and its skeletal animation support are always useful for ones animation work.
Adobe Flash Professional CS5.5 can be used to create games for iphone too.
Hope this can help you!

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I've always used photoshop but I'm sure there are better software solutions out there, since with photoshop you're basically drawing the animations frame by frame.

Graphics Gales was popular with spriters back in the day, may be worth checking out.