There is an important limitation that you have to notice with the MSDE database.  Although it can run on most Windows operating systems, it has a total database size of 2GB.

First, you have to install the MSDE server by running the setup.  The next step would be to create a database of the size and location you require - this is easily done through the Enterprise Manager.

The next step would be to configure the Email Server to use that database by pressing the Configure button. 

Change the Server field to the name of the computer that runs the MSDE server.  If it is on the local computer you can use a period.  If you have the client utilities installed (not standard with MSDE, it is provided with SQL server), then you will also be able to choose a server from the list. Next, select the database from the list of databases available on the server.  If you use NT integrated security, then no username or password is required, and you can just tick the "Trusted Connection" checkbox, otherwise you have to enter a valid username and password for the connection.

The neccessary tables required for the functioning of the Email Server will be created automatically, once the connection has been established.