The Messages app on the iPhone is alright if you're using it like a one-window chat system, but once you start doing other things on your phone, constant popups you can't do anything with are a source of extreme frustration.
BiteSMS is a good way to solve this problem (if you've jailbroken your iPhone). There's a pretty large list of things you can do with biteSMS, but the above video shows off my favourites. The absolute best are quick reply and quick compose, which let you bring up a little popup no matter where you are and send messages directly from there—no app swapping necessary—as well as being able to see messages and reply. You can even see the last few messages of your conversation by dragging down the scroll bar in the quick message view.
Other cool stuff! Delivery reports, quick smilies, access to your favourites, autocomplete, credit counter (if you only have 200 or 1500 messages per month), forwarding, templates, scheduling and privacy lock.
It's not free, unfortunately, so you'll have to pay the $US9 for the privilege of upgrading your SMSing. BiteSMS also offers SMS credits to pipe your texts through their system, in case you do a lot of international texting. Rates aren't cheap—$6 for 50, $US12 for 105, $US120 for 1200—but they beat your standard carrier rates for overseas SMS.
Again, this is a jailbreak app, so if you're only kinda into jailbreaking, be aware that you'll only be able to run this as long as you have a jailbreak. Meaning, if you're anxious to update to a new version of iOS that doesn't have jailbreak yet, you'll lose biteSMS. There's a 15 day free trial for you to play around with to see if you like it. [biteSMS]