Naive question, but I keep trying iTerm and not being able to quite figure out why I should switch. In the mid-2000s it was a much better program than Terminal.app, but that doesn't seem to have been true for quite some time. Terminal.app has tabs, 256-color mode, themes, full screen support, and as people have mentioned in other comments, session recovery and
much better performance. The only things I can think of offhand that that leaves in iTerm's court -- at least in the 1.x series -- is tmux integration and autocompletion. The latter I've never seen the point of (my shell does that pretty well, thanks) and after trying the former it seemed like it was more bothersome than just letting tmux handle everything on its own.
Okay: iTerm can put borders around its windows, which one of my friends says Terminal.app's inability to do makes it unusable for him. But beyond that, I just haven't been sold. (If that's the right phrase for free software. You know what I mean.)
[Edit: I think the tmux integration was a 2.x-dev feature, so I must have been using that. IIRC, I actually preferred tmux's own "window" handling.]