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When you install WSSv3 using the default (Basic) installation it installs all the stuff on a single server and uses “embedded SQL Server 2005 Express” as the database. This special edition is called “Windows Internal Database” or “WID” and has an unlimited capacity (it is also the same database used by WSUS)
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When you install MOSS 2007 using the default (Basic) installation it installs all the stuff on a single server and uses “embedded SQL Server 2005 Express” as the database. However, it is does not use WID – it has the standard 4GB SQL limit (thus you won’t go far using this and changing can be a punishing or at least time consuming effort)
Note, if you were to upgrade WSS 3.0 to MOSS 2007, you would (of course) then have a real Microsoft SQL Server (2005 or 2008) on hand. However, only new databases would end up in SQL Server, while your existing Farm Confirmation and Content Databases would stay in the WID until you move them (you *can* move them of course).