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
I can speak from first hand experience that it is often a good idea to place the web server and database on different machines. If you have an application that is resource intensive, it can easily cause the CPU cycles on the machine to peak, essentially bringing the machine to a halt. However, if your application has limited use of the database, it would probably be no big deal to have them share a server.
Arguing that there is a real performance gain to be had by running a database server on a web server is a flawed argument.
Since Database servers take query strings and return result sets, the data actually flowing from data server to web server is relatively small, but the horsepower required to process the query and generate the result set is relatively large. Optimizing performance around the data transfer time therefore is optimizing around the wrong thing.
Regarding security, there are advantages to having the data server on a different box than the web server. Having such a setup is not the be all and end all of security, but it is a step in the right direction.
Regarding scalability, it is easy and relatively cheap to add web servers and put them into cluster to handle increased traffic. It is not so easy and cheap to add data servers and cluster them. Also, web servers and data servers have different hardware needs, so multiple boxes help out with scalability.
If you are starting small and have only one box, then a good way would go would be to use virtual machines. Running the web server and data server in different VMs on one host gives you all the gains of separate boxes at the cost of one large box price.
Database licences are not cheep and are often charged per CPU, therefore by separating out your web-servers you can reduce the cost of your database licences.
E.g if you have 1 server doing both web and database that contains 8 CPUs you will have to pay for an 8 cpu licence. However if you have two servers each with 4 CPUs and runs the database on one server you will only have to pay for a 4 cpu licences
All that being said, I can certainly see reasonable cases that none of those points really matter.
One factor that hasn't been mentioned yet is load balancing. If you start off thinking of the web server and the database as separate machines, you optimize for fewer network round trips and also it gets easier to add a second web server or a second database engine as needs increase.
Operating system is another consideration. While your database may require larger memory spaces and therefore UNIX, your web server - or more specifically your app server since you mention only two tiers - may be a .Net-based, and therefore require Windows.