Listening to Scott Hanselman\'s interview with the Stack Overflow team (part 1 and 2), he was adamant that the SQL server and application server should be on separate machin
On the other hand, referring to a different blogging Scott (Watermasyck, of Telligent) - they found that most users could speed up the websites (using Telligent's Community Server), by putting the database on the same machine as the web site. However, in their customer's case, usually the db & web server are the only applications on that machine, and the website isn't straining the machine that much. Then, the efficiency of not having to send data across the network more that made up for the increased strain.