Reference: http://www.microsoft.com/sql/technologies/security/whitepapers.mspx
Here is the white paper for SQL Server 2005 Encryption. I am working on an application that will use the Microsoft.SqlServer.Management.Smo API to decrypt data in the business tier instead of using T-SQL to do it. I'll post it once I get it all done.
SQL Server 2005 Encryption Whitepaper
Tom Hundley
Elegant Software Solutions