Usually the issue is concerned with SQL Server housed on the same box as a
web server running OUTSIDE the firewall.  Typically (!) DB servers are not
placed outside the firewall.  There is nothing inhirently insecure about IIS
and SQL Server on the same box, although you will want to review the
recommendations on hardening both your IIS and SQL Server installations.

hope this helps.

dlr

This has always been a recommendation from the security community.  the
issue is that separating roles is a security practice - you DON'T want to
host your database on the same server that hosts your Web server.  Surely
however, you would apply proper Firewall rules that only allow inbound TCP
80 and 443, and not 1433.   The reasons  for separation are numerous.  For
example, a vulnerability in IIS would lead to a direct compromise of the
data.

This issue is largely dependent on the application's design.  Are you
allowing Anonymous access?  Then your chances of getting compromised are
that much greater.

Honestly, this recommendation was originally conceived from the notion of
separating application components - one that serves web pages and one that
holds data.  But it was also conceived during the early days of IIS 4/5 when
vulnerabilities were very severe and seeemed to come out every week.  IIS6
is much stronger.

You could get away with it on one server, but you need to lock down IIS, SQL
permissions, and the application's functionality as much as possible.
If you can afford two boxes and separate them by a firewall - DO IT.
But remember, if your making your connection from IIS to SQL as a full
sysadmin or dbo level, then once your IIS box gets compromised, the hacker
will likely have access to the database with that level of permission.  SO,
USE a LOW PRIVILEGED account for data access.

The majority of attacks today are exploiting poorly written
web-applications, not the underlying infrastructure so much.

/Chris