Don’t loose your iPhone if you have sensitive data on it.  According to this blog post,

The new iPhone 3GS includes hardware-based encryption, giving the impression that your data is more secure than on previous models. A well-known iPhone security expert shows, however, that the data is just as easy to grab using simple hacking tools.

The good news is that it is still vulnerable to common “jailbreak” programs like purplera1n or redsn0w which make it possible to use your phone on networks other than that with which you originally had a contract.  Just remember, you void your warranty by using such programs.
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via New iPhone hardware encryption not even close to hack proof – Ars Technica.