When upgrading my .sdf file into a newer version (3.5), I got the error 8007007e the specified module could not be found. This way, no clues, no dinner, no love. After looking around (Internet seems to be infinite when you cant find what you´re lookin for), I have the idea to copy all files from the folder of \program files\SQL Server compact...\ into the folder EN, inside of this same folder, where the isqlw.exe lies down. Voilá, no more problem when upgrading. For some reason, my files were outside the language folder, hence the libraries were also outside, unreacheable for the isqlw.
This applies to SQL Server Compact running on Windows CE 5, using .NET Compact framework 2.0 and 3.5. My desktop has VS2008 and VS2010 ultimate installed.
Hope to help, just in case.