>But does MS allow MSDE to work in a web environment?

I'm not aware of any licensing restriction against it, if that's what you mean. Of course, MSDE may not be the right choice for a Web application for other reasons, such as the concurrent workload governor, which limits performance, and the lack of some administrative and scalability features that are available with full SQL Server. But MSDE is designed for use in small workgroup situation, which could certainly involve a Web environment either on an intranet or even on the Internet.