SMS, or Short Message Service - is the formal name for text messaging. It’s a means of sending short, text-based messages from one phone to another. Though it is most commonly known as text messaging, many cell phone rate plans, including those used for the iPhone, refer to the technology, and the number of messages allowed in a rate plan, as SMS.
The iPhone’s lack of multimedia text messaging – the ability to send photos, videos, and audio – was a controversial feature of the first-generation iPhone. Subsequent models gained the ability to send text messages and multimedia messages containing music, photos, videos, and more.
Current iPhone and iPod touch models come pre-loaded with an app called Messages, which allows users to send text messages. The Messages app also includes a feature called iMessage, which allows iOS users to send messages directly to each other without using phone company networks (the messages are sent through Apple's servers). This feature was originally designed to allow iOS users to text without using their monthly allotment of text messages. Most phone companies don't limit text messages these days.
- More on SMS at Wikipedia
Related: Free Texting Apps for the iPod touch