One of the "missing" functions in iPhone and iPhone 3G has always been encryption capability. This can somewhat be compensated by using third party software, for example a commercial SafeWallet or a decent freeware alternative Keeper. However, if a device has built-in security features and they are good and strong, using built-in features is almost always better. For example, think about TPM-enabled laptops. I'm pretty happy with my HP and I feel quite safe. Even if it is stolen, the sensitive data is protected.
What can be said about iPhone 3GS' built-in encryption functionality? The main purpose for including encryption in iPhone 3GS is to make the device appealing to business users. Unfortunately, if you are a business user like me and depend on iPhone 3GS' built-in encryption, think twice before protecting sensible data with it.
As it turns out, a couple of minutes and a couple of freeware applications is what it takes to crack iPhone 3GS' encryption. At least, this is what an iPhone developer and a hacker Jonathan Zdziarski claims. According to Zdziarski, iPhone's encryption is poorly implemented. The bottom line is that, even though iPhone 3GS includes a built-in encryption, it's totally useless. After all, what's the use of security features that cannot be trusted?
Let's hope that Apple will improve this drawback in the future firmware releases. Meanwhile, third party software is the way to go.