Microsoft Office 2007 uses SHA-1 hashing with 128 bit AES encryption in order to provide a stronger level of security. Documents encrypted using this method cannot be read by users of Office 2003 unless the Microsoft Office Compatibility Pack has been installed.
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Even with the compatibility pack installed, Microsoft Office 2003 cannot encrypt documents using SHA-1 AES encryption, the standard for Office 2007. Instead, Office 2003 must rely on the older RC4 stream encryption technique.