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Microsoft's response to SQLite is SQL Server Compact Edition 4

 

UPDATE: Get Sql Server compact Edition 4 CTP from here and tools from here

 

For a small project you usually want to use light weight database engine without any server installation. SQLite and .Net implementation of it  System.Data.SQLite was perfect for light weight web projects. Now there is SQL Server Compact Edition 4 from Microsoft. Due to be released shortly it will have features such as...

 

"Works with Existing Data APIs

SQL CE works with existing .NET-based data APIs, and supports a SQL Server compatible query syntax. This means you can use existing data APIs like ADO.NET, as well as use higher-level ORMs like Entity Framework and NHibernate with SQL CE. Pretty much any existing data API that supports the ADO.NET provider model will work with it.

This enables you to use the same data programming skills and data APIs you know today.

No Database Installation Required

SQL CE does not require you to run a setup or install a database server in order to use it. You can now simply copy the SQL CE binaries into the \bin directory of your ASP.NET application, and then your web application can run and use it as a database engine. No setup or extra security permissions are required for it to run. You do not need to have an administrator account on the machine. It just works.

Applications you build can redistribute SQL CE as part of them. Just copy your web application onto any server and it will work.

Database Files are Stored on Disk

SQL CE stores databases as files on disk (within files with a .sdf file extension). You can store SQL CE database files within the \App_Data folder of your ASP.NET Web application - they do not need to be registered in order to use them within your application.

The SQL CE database engine then runs in-memory within your application. When your application shuts down the database is automatically unloaded." 

 

 It sounds really cool. Head to http://weblogs.asp.net/scottgu/archive/2010/06/30/new-embedded-database-support-with-asp-net.aspx for more info.