I don't know what has happened. Something in Visual Studio got corrupt and I had to uninstall and reinstall it. Could be that I uninstalled something that I was not supposed to.
To be very clear when I use File | Connect Object Explorer ... in the Server Type drop down the option for Compact Edition does not appear. Further my applications using the compact edition work fine.
Here is the info from Help | About:
Microsoft SQL Server Management Studio 10.0.2531.0
Microsoft Analysis Services Client Tools 10.0.1600.22
Microsoft Data Access Components (MDAC) 6.1.7600.16385
Microsoft MSXML 3.0 5.0 6.0
Microsoft Internet Explorer 8.0.7600.16385
Microsoft .NET Framework 2.0.50727.4927
Operating System 6.1.7600
I have already tried reapplying SP1.