Apple Insider reports that the latest build of the international iPhone 2.0 firmware has handwriting recognition for Chinese language. It is said that the update adds new input methods under the keyboard settings, one of which is handwriting recognition.
“Unfortunately, handwriting recognition is only available in Chinese (Traditional and Simplified) and doesn’t support English,” he told Apple Insider.

The way it works is when you draw a symbol, there is possible matched in the column to the right of the input area.
Hopefully we will have English language character recognition as well in the near future.
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