Do not ever encrypt your iPhone backup!
If you forget the password, you will never be able to use the backup function to restore your iPhone. Deleting the existing backup and creating a new one doesn't work. You will still need to enter your original, forgotten password, before you will be permitted to restore from the new backup. Apple does not consider this a bug. I was told that I should create a new user on my MacBook Pro and use that to backup my iPhone. Not much of a workaround.
iPhone 4, iOS 4.3.2