There are a number of apps available for iOS for music creation, ranging in complexity from simple synths and virtual drum kits, to quite accomplished sequencers/DAWs (Apple's own garageband is a perfect example). If i remember rightly Damon Alban created the newest Gorillaz album entirely on the ipad [1]
Note: I don't own an ipad, i just lust after all the cool music apps. I wish people would get started creating equivalent apps for android tabs (though i understand there were historical issues with the audio API in android, which i believe were rectified as of ICS)
I've seen professionals use an iPad as a drum sequencer. Not sure which app, but there you go. The audio output is fine, and a touch interface is definitely suitable for certain music applications, especially live performance.
There are several synthesizer apps where you trigger notes and control various parameters using multi-touch on a 2D surface. More expressive than a normal keyboard, more likely to come up with something new and interesting, and cheaper than esoteric MIDI hardware controllers that allow similar things.
As a professional classical singer, I often use the iPad in lieu of sheet music for concerts, and so do my colleagues. It's become rather popular for that use. Check out ForScore if you want to see what a nice music-reader app looks like.
Musicians use the iPad in all kinds of different ways.
This is actually an example of content consumption from the iPad.
As a singer, you're creating music. But you're pulling information from the tablet - not creating content on it. This example actually supports the idea of tablets being optimized for consumption over creation. Content is going from the iPad to you, not vice-versa.
