When considering which backend database to use in a new installation of vSphere 5 you have the following options:
Microsoft SQL Server 2005 or 2008 32 bit or x64 patched to the latest SP release
Microsoft Sql Server 2008 R2
Oracle 10g R2 , 11g R1 or 11g R2
IBM’s DB2 9.5 or 9.7 patched to the latest versions
SQL Express 2008 is also supported and bundled with vsphere
It is naturally recommended to house the vSphere database on a seperate server for added resiliency however with most deployments you can quite happily install the database component on the same server as the vSphere installation (whether this is physical or running as a vm). It is also worth checking which databases vmware update manager or other add-ons support if you intend to install these on the same server and of course consider what you in-house support is happiest managing (its no good installing vSphere using an Oracle database if the support staff have only ever administered SQL).