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Windows Mobile 6.0 onward supports AES 128 Encryption for files written to the SD card. If this is enabled either by the user or via [Exchange] policy then any files that are copied to the SD Card, edited on the SD Card or moved to the SD card will be encrypted. Any files that existed on the SD card that were obtained from other sources like a PC will not be touched. If you removed the SD card from the Windows Phone you WILL NOT be able to read the encrypted contents on any other Windows Phone or PC.
Note:
1. There is no way to export the Encryption Key
2. The Encryption Key Changes on Hard Reset
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What's with the MENC extension?
The files are stored on disk with a MENC extension - this lets the encryption filter know quickly which files are encrypted and if they match the key on the device. If you put the storage card in a desktop card reader, or put it in another device, you will see that the files have a MENC extension. The point of the extension is that you can't read those files, so the extension makes it harder for you to try to load those files into an application that won't be able to read them anyway. We also were able to associate a lock icon with the extension to add an additional hint.
If the encryption filter on the device is able to read and decrypt the files, it hides the MENC extension so the file looks like normal.
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Sorry to say you are basically SOL. The trick is to decrypt the files before hard resetting the phone. The keys are stored internally on the phone and as noted above, are not exportable. I do not think the backup utility would / could have backed them up either.