I manage ~30 iPads for business program. I set up the iPads originally almost 2 years ago. There was no encryption specified on initial setup.They do not get synced to any machines. We are bringing the devices back in now for an upgrade to iOS5 and some additional apps to be installed.
I've run into this issue with 3 of 9 iPads that I've tried to update so far. I've spent countless hours trying all the suggestions here and in other forums with no success. I've spent over 6 hours on the phone with Apple support with no progress and no admission that this is in any way their fault. Their contention to date is that WE specified a password for encryption at some point - either on the original configuration - or the user specified it during a sync/backup to iTunes without my knowledge. This is simply not the case. There has been no password set by me or any user as they do not sync/backup these devices. I have an open ticket with Enterprise level support and hope they will provide some insight very soon, but based on what I've been reading here and other places I'm not entirely optimistic.
A few things that I have discovered along the way:
1. When you plug your iPad into your computer, if it asks to install iOS5, cancel it. Then select the device at the left, look at the bottom of the summary tab. If the box is checked that says 'Encrypt iPad Backup' and you don't know the password - stop there. If you initiate a backup with this checked, you will never be able to restore unless you magically guess what password iTunes assigned. (Again, see above - Apple support is adamant that YOU specified a password for a backup somewhere along the way and assumes no responsibility for "lost" passwords and the fallout resulting in a blank iOS5 device that can't be restored.)
2. On a mac, unecrypted backups are stored in Library>Aplication Support>MobileSync>Backup
Encrypted backups end up in Library>iTunes>MobileBackups
I can't say WHY they go to a different place or how this might help you, but that's where they are.
3. If you do end up with a blank iOS5 device, you can at least recover apps by signing into iTunes, connecting your device, and checking the sync apps checkbox. This will at least reload the apps - but associated data, pictures, movies, mail settings, etc. will not be reovered.
If Apple support is any help or if I find a solution that works for me, I will add another post. This is a legitimate problem that is not user-created. I would be able to believe that a FEW users may have assigned a password on backup and then forgot they did, but thousands? No way. And as in my cases, these machines have never been backed up, so there was never even an opportunity to assign a backup password. I hope Apple takes this seriously and provides a fix, but it looks like this has been going on for a while unaddressed.