Recs.
Updated
iTerm2 is a replacement for Terminal and the successor to iTerm. It works on Macs with Leopard, Snow Leopard, or Lion. Its focus is on performance, internationalization, and supporting innovative features that make your life better.
For alternative OS X terminal emulators see here.
SpecsUpdate
Pros
Pro Open pre-configured layouts of windows & panes for projects with iTermocil
Pro Smart filters that will perform actions when certain text appears in the terminal
Pro Any key can be mapped to any function
Using the Preferences Menu you can set up hotkeys to map virtually any action you can think of to a single key or a combination of them. This is extremely helpful as it allows you to use shortcuts to edit commands you are typing in the terminal and while most terminal emulators have shortcuts for this sort of thing, few of them let you define your own.
Cons
Con Quirks with copy on select
Sometimes it doesn't do what it claims it will — you can select a text snippet but it won't get into clipboard.
Recommendations
Comments
Out of Date Pros + Cons
Con Doesn't support ligatures
Currently doesn't support ligatures in fonts. This has been assigned to the 3.1 release.