During the visual studio 2005 beta I did some testing with CF v2 and was very excited by the results.  The tests were done on one of my CE.net 4.2 devices.  I was told by numerous Microsoft people that when the final version came out it would require CE 5 to run, which is a serious kick in the junk.  There are some very serious issues with the CF version 1, most notably working with SQLCE 2.0.  By forcing the CE 5 issue, any future hope for people who don't have the ability to upgrade to CE 5 is crushed.  Did I say it was a hard kick in the throat?  Just to tease me, creating a Smart Device CAB project in VS 2005 shows "OSMin" as 4.00, this is clearly just thrown in to confuse and annoy since OSMin is really 5.0.

On well known compact framework usenet guy Daniel Moth's blog (link is not working for me) he states that there is a chance that a service pack for the Compact Framework v2 will include "runtime only" support for ce.net 4.2;  I would assume this will allow SQL Mobile to run as well.  I would encourage you to go to http://lab.msdn.microsoft.com/productfeedback/ and do a search for compact framework 2 on CE.net 4.2 and vote for it.