A researcher has delved into the encryption used to protect content on the iPhone 3GS, only to claim it is "entirely useless" and that he had "[never] seen encryption implemented so poorly before".
Jonathan Zdziarski spent a couple of minutes demonstrating to Wired that he could copy and decrypt secured information from an iPhone. He removed the SIM to disable any remote-wipe procedures - demonstrating a security risk and concluding that "Apple may be technically correct that [the iPhone 3GS] has an encryption piece in it, but it’s entirely useless toward[s] security".
Earlier iPhone models don't use encrypted storage, but from the demonstrations performed for Wired, it seems that the iPhone 3GS will happily, and automatically, decrypt information as it's copied from the device using a remotely-installed shell - rendering the encryption pointless at best.
Apple might have demonstrated their inability to implement decent cryptographic protection of the content, but few phone systems even bother to make the attempt. With the notable exception of RIM's BlackBerry devices, it's best to assume that once an attacker has physical possession of the phone he'll gain access to the contents pretty quickly. Legally-used forensic software spends most of its time maintaining a legally-verifiable audit trail, rather than using clever techniques to extract the data.
There is an argument that implementing such weak security is worse than not bothering at all. Apple appears to be lending users a false confidence while allowing miscreants free access. But it seems unlikely that many enterprise customers were relying on Apple's encryption to protect their corporate secrets, and if they were, then they should think again