The guy behind recent Twitter purchase Tweetie, along with the dude behind Borange, have put together a characteristically pretty SMS replacement app called Textie. There are two things you should know about it: It's free, and it works.
Textie texts just about any way you want it to, trading messages through email aliases between Textie clients (free), through phone numbers between Textie clients (free), between Textie and email clients (free), and between Textie and other phone numbers not associated with Textie apps. (Free for you, but possibly not for the other person in the conversation, who may incur regular texting charges.) The only carrier that doesn't play well with Textie is T-Mobile.
So, how does it work? Pretty well. The texting interface will make sense to anyone used to the iPhone's SMS app, and is littered with the little visual flourishes that endeared people to Tweetie. Push notifications come quickly, though the headers can be a bit long. And no, Textie texts don't draw from your monthly quota, so this is unlimited texting, in effect. Overall, this is an app that could conceivably replace the iPhone's default SMS app, especially—but not exclusively—if you have most of your text conversations with other iPhone users. On the matter of price. Textie is free, but supported by ads. It costs $2 to go ad-free, available via in-app purchase. [Textie]