Intua's BeatMaker (US$20, iTunes) bills itself as a "mobile music creation studio" for the iPhone and iPod touch. It's a revolutionary application that allows you to easily create and edit beats and loops in the palm of your hand.
After using it a little it becomes so intuitive and easy that you can use it to perform live via the audio out jack. For the best experience attach a quality set of earbuds and just tap away on 16 multi-touch drum pads – it's really fun. The interface can be a little daunting at first, but after a little practice it becomes second nature.
BeatMaker's combination hardware beatbox, loop sampler and software sequencer turns your iPhone/iPod touch into a full-on software instrument. It allows you to compose, record, arrange, and edit beats, samples and loops into a complete track, and even share your creations with others.
The program goes even deeper and I've only just scratched the surface. I'm looking forward to playing with it more and to slipping in a short live iPhone set during an upcoming DJ gig. At US$20 it's a little spendy, but it's definitely worth a look if you're even remotely into music and beat creation.
This YouTube video (10:36) gives a demo of the user interface.