If BCM can't contact the server you should first verify that you have a
process named sqlmangr.exe running. If not check that you have Sql
Server service named something like <your-machine-name>\MICROSOFTSMLBIZ
and that it is set to start automatically.

The MSDE (Sql Server) databases are stored in .MDF files in something
similar to c:\Documents and Settings\<your-login-name>\Local
Settings\Application Data\Microsoft\Business Contact Manager