how to distribute MSDE 2000 with a custom application by embedding MSDE 2000 Setup within the setup program of the custom application.

local data storage that is compatible with SQL Server
designed and optimized for use on smaller computer systems, such as a single computer or a server used for a small workgroup
distributed as a  set of 25 merge modules.

merge modules.
Merge modules are files with an .msm extension.
cannot be installed by itself because it lacks critical database tables that are present in the installation database of an .msi file.

embed MSDE 2000 Setup into any custom setup by consuming these merge modules.
Embedding MSDE 2000 Setup into a custom MSI setup program, in essence, merges the merge modules into an MSI package.
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Windows Installer  & Microsoft Platform SDK
Windows Installer, which is included with the Microsoft Platform SDK, is a powerful tool that is used to set up software products in Windows environments.