iOS hardware encryption is better than nothing - but only slightly better. It rarely protects against an attacker with any skill who has physical access to the iPhone, for several reasons:
1. At best, it's only as good as the PIN used - most people use a four-digit PIN - that can be cracked very easily
2. Only some applications have their data encrypted (it's opt-in).
3. An "escrow keybag" that's used to decrypt everything is kept on any computers that sync with the iPhone - so if the user's home computer is compromised, so is their phone.
So generally it's only really useful for the remote-wipe feature. Which can be defeated by simply wrapping the phone in tin-foil or removing the SIM, then copying the data.