When you connect your iPhone, iPad or iPod touch to your iTunes library - iTunes will make a backup of all the data on your device and store it locally on your PC. This data includes your contacts, messages, notes, calendars etc.
Optionally, you can specify that iTunes should encrypt this backup for additional security of your data. When you opt to encrypt your devices backup data, iTunes asks you for a password.
The screenshot below shows the area within iTunes where these settings are made...
TouchCopy is able to read encrypted backups (see below), however, you can remove password encryption by clicking on the "Encrypt iPhone Backup" checkbox in iTunes. iTunes will ask you to enter your existing backup password before removing encryption.
TouchCopy is able to view data on encrypted devices, however, you need to give TouchCopy the password you used to when opting to encrypt this data using iTunes.
TouchCopy will detect that the data on your device is encrypted and prompt you to enter the backup encryption password...
Note that you will not need to enter your password when viewing Music, Photos, Apps or Files on your iOS device. You will not need to enter a password at all for non-iOS based devices. (i.e. iPod Classic, iPod nano etc.).
TouchCopy only uses your backup encryption password for the sole purpose of reading the data you require from your device. The password is not stored in any location on your computer or elsewhere. You will be required to enter your password again if you restart TouchCopy.