Licensing is one area where I always struggle to give my suggestion because it’s a legal issue and the suggestion should politically correct. Check this document right from Microsoft...
Also Check this thread
Developer and Express edition Licensing Model always need little clarificaiton
Developer Edition Licensing
The Developer Edition of SQL Server 2005 is available for a fixed price of $49.95(subjected to change). The Developer Edition is licensed per developer and must be used for designing, developing, and testing purposes only.
Express Edition Licensing
The Express Edition of SQL Server 2005 is available via free download Microsoft site. Developers can redistribute it with their applications at no cost by simply registering for redistribution rights with Microsoft. The Express Edition does not require a CAL when it is used on a standalone basis. If it connects to a SQL Server instance running Enterprise Edition, Standard Edition, or Workgroup Edition, a separate user or device CAL is required unless the SQL Server instance it connects to is licensed under the per-processor model.