Guys, here is our experience with this bug (and yes Apple this is a bad bug not a bad memory) and here is how we got around it.
My wife recently attempted to upgrade her iPhone to 5.1.1 and iTunes advised her that she would need to do a complete backup and restore process on her iPhone which she agreed to and let it start. So it did the backup, upgraded her iPhone and then when it attempted to restore the backup it halted and asked her for the password for her encrypted backup. As other folks have indicated, she hadn't requested this backup or any other backup in the past to be encrypted, but regardless we could not proceed beyond this point. We tried every combination of password she or I had ever used with no avail. We also spent hours with the Genius Bar folks and the online Apple support folks and received plenty of empathy but no results. You really are left with the impression that this is your fault and that somewhere in your dark past you or someone in your family encrypted a backup with a password.
So we went the Elcomsoft password breaker route which some folks here have used with success. i would like to share my experiences here because I feel I owe this forum a favour and also to make sure you know how to get this software to best work for you ,because even though its very powerful, its not totally intuitive.
First Attempt - We downloaded the Elcomsoft free trial version of the software, told it to run, asked it to go against our iPhone backup file, selected the most recent iPhone backup (btw this wasn't that days but instead was one from 2 weeks ago - another bug Apple) and told it to start. When it starts, it will tell you how long it expects to take and in this case it said 4 hours. As the Elcomsoft software is running it says what its "attack rate" is of approximately 700 password attempts per second and it displays its current attempt every second so you can see it work through the possibilities. In this case, under their "task" I had accepted the default "english dic - no mutations" So with this default it just attacked with standard unicase dictionary words and after about 2 hours it finished with no success.
Next Attempt - I wasn't suprised and decided to look deeper. If you double click on "english-dic" it will open a box showing your selection and displaying the mutations options "disabled". if you click that, you can see that you also have the options of minimal, average or maximal mutations. I chose "maximal" and it in turn advised me that it could take up to 4 days to run this attack! So I quickly backed off from that and chose "minimal" and it in turn advised me that it would take up to 30 hours to run this attack. I chose this solution, but before running it on my wife's backup, I ran it on my iPad's backup on a separate computer where I intentionally protected it with a password of "1234". Off it went, and you could see it apply different combinations of numbers, letters and special characters. In was kind of fun to see and in less than 2 minutes, it found the password and came back showing 12**. If you want to see the ** characters, you then need to buy the application at around $80 and get a registration key.
Successful attempt - So with that little success under my belt, I started the "minimal" attack on my wife's computer and her iPhone backup. And 25.5 hours (it said it took 91,871 seconds) later it was successful and showed the result as Pr*****. So at this stage, you could try variations of Pr and 5 characters, but since we had never encrypted our backup and also never used a password beginning with Pr, and because Elcomsoft was going to save us a lot of grief if we had to leave the iPhone at factory settings, we elected to register the software and proceed with payment. Success!! Her phone is now on 5.1.1, all her application data is in place and we have a happy household and I am a hero!
Learnings - #1 - Encrypt your iPhone/ iPad backup intentionally with a password you selected vs. letting some bug somewhere select it for you. #2 - Make sure all your important passwords such as your PC or MAC signon and your online banking software are secure and complex, because this type of software is very powerful and there are a lot of bad guys out there that will use it for the wrong reason. Elcomsoft has provisions to protect it from being used for the wrong purpose, but others might not. During those 25.5 hours, I estimate it attempted over 64 million attacks! #3 Elcomsoft is in Russia! So it will take a few hours to process your payment since they don't seem to work 24/7. So kinda of scary, but it worked.
Thanks
Fred