How well do you trust your neighborhood?
I hide my SSID and I do MAC Address filtering. I do NOT use any encryption. My iPhone and my iPod Touch BOTH have the latest OS3.x release and they stay connected very well.
IMO It is WAY too much effort for someone to roam around the neighborhood looking for hidden SSID's, and then when they find it, they have to hack your MAC (no pun intended), so I feel very safe with my config. However this is not recommended for businesses with critical data on the network, because people will look to hack in there.