Simple answer: yes you can, but set your Sql Express instance up as a named instance, don't try and use the file-only setup like DNN comes with out of the box.  Forget about the app_Data folder  and create your databases in your Sql Express instance in exactly the same way you would with Sql Server 2000/2005.  You'll need to mod your connection string as well for the Sql Express instance way, but it's very similar to the full Sql Server version.

Sql Express is surprisingly full-featured, just make sure you hunt down the download for the Sql Server Express Management Studio application, you'll need it to create and manage your databases. 

And another thing - don't forget to setup some sort of backup process.  Sql Express comes without the Sql Agent, and the Sql Agent is what automatically backs up your databases.  You can do a file-level backup somehow, or you can search around and find some backup Sql, and then set that up in some sort of schedule, either with windows scheduler, or even a Sql Agent job on a Sql 2000 box somewhere if you can.