The official licensing guide says:
A limitation of the legacy
copy-protection mechanism on Android
Market is that applications using it
can be installed only on compatible
devices that provide a secure internal
storage environment. For example, a
copy-protected application cannot be
downloaded from Market to a device
that provides root access, and the
application cannot be installed to a
device's SD card.
It seems that you would benefit from using that legacy cop-protection to prevent your application from being installed on rooted devices.
You might release a separate version that can be installed on rooted devices with an encrypted database.