You can encrypt data held in a column using EncryptByPassPhrase.
See Keep Bad Guys at Bay with the Advanced Security Features in SQL Server 2005
Transparent Data Encyption was only introduced in SQL Server 2008:
In SQL Server 2008 (Enterprise Edition
only), a new form of database
encryption has been introduced:
Transparent Data Encryption (TDE),
which includes these major features:
•Encrypts the Entire Database: With
essentially a flip of a switch, the
entire contents of MDF files, LDF
files, snapshots, tempdb, and backups
are encrypted. Encryption occurs in
real-time as data is written from
memory to disk, and decryption occurs
when data is read from disk and moved
into memory. Encryption is done at the
database level, so you can choose to
encrypt as few or as many databases as
you want. The major benefit of
encrypting a database with TDE is that
if a database or backup is stolen, it
can’t be attached or restored to
another server without the original
encryption certificate and master key.
This prevents those nasty situations
you hear about in the news where a
backup of a database has been shipped
from one location to another and is
“lost,” which potentially exposes a
company to liability issues.
•Easy to Implement and Administer: As
its name implies, Transparent Data
Encryption is transparent to
applications. This means that your
applications, and database schema,
don’t have to be modified to take
advantage of TDE. In addition, initial
setup and key management is simple and
requires little ongoing maintenance.
•Uses Minimal Server Resources to
Encrypt Data: While additional CPU
resources are required to implement
TDE, overall, it offers much better
performance that column-level
encryption. The performance hit
averages only about 3-5%, according to
Microsoft.