In the latest iPhone OS update, version 3.1, Apple finally came clean about not supporting full device encryption, despite pretending to Exchange Servers who were requesting the device supports the policy that they did.
iPhone generation 1 and 2 owners who update to the latest version of the OS will find the following error if their Exchange Admin has requested full device encryptions on connecting smartphones:
The only other alternative would be to upgrade to an iPhone 3GS, something which would suite Apple very well of course. Apple may however not enjoy as much being held liable for intentionally exposing companies to criminal prosecution for violating security policies.
Windows Mobile has supported full device and storage card encryption since 2007.