SQL Server Desktop can run under win95 and win98. MSDE is 100% compatible with SQL Server, in fact this is like SQL Server. MSDE have the same functionnality that SQL Server has with some restrictions : 2GB database limit, 5 users connection maximum, I think that windows NT security is not allowed and there is no tools to work with MSDE. You must user tools that comes with Visual Studio product. I recommend installing tools from SQL Server (any version) it is much easier.

Your problem comes by the fact that MSDE and SQL Server Desktop can not run on the same machine. I am not sure at 100% so if someboky can confirm.