Database Encryption
Q: When I go to upgrade my database there are a number of Encryption options. What do they all mean?
A: To support older operating systems, with older encryption algorithms, and newer, more secure encryption, SQL Server Compact 3.5 supports backward-compatible encryption modes. The encryption modes available in the Upgrade to SQL Server Compact 3.5 Database dialog box are as described in the following list.
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Platform Default: When you create or upgrade SQL Server Compact databases, Encryption mode will select the default encryption for the operating system. By creating a database on one of the newer platforms shown here, older platforms (such as Windows CE 4.2 or Windows Mobile 2003) will be unable to open encrypted SQL Server Compact files.
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Engine Default: By default, the encryption mode for the SQL Server Compact 3.5 database file will not work on Windows CE 4.2 or Windows Mobile 2003 Software for Pocket PC. This encryption mode will work on all newer SQL Server Compact 3.5 supported platforms.
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PPC2003 Compatibility: While less secure, this option can be used to support older and newer operating systems
[Sources from Ambrish's post on the SQL Server CE 3.5 forum]