Author-it uses a SQL Server database to house all of the source material that make up your deliverables. You can export that database content to XML and publish to Word or HTML and other outputs, but the source is stored in a database.
For locally-run databases (meaning that Author-it and the database are on the same computer), you can use a Jet database (also known as Jet, or MSDE, or SQL Express) to store your content. Updated to add: With a Jet database, your content cannot 2 GB and the upper limit for users is 5.
For server database installations, where the content is stored on a separate database server, you can use SQL Server 7.0, SQL Server 2000, or SQL Server 2005. You can use a pre-existing SQL Server database such as one that your company uses already by simply asking for a database to be created with certain permissions already set. That configuration is what we do at ASI.
You can also install and run your own SQL Server database using SQL Express which is relatively painless to set up and the installation instructions from both Author-it and Microsoft are detailed and thorough. The limitation for this configuration is that your Author-it library cannot exceed 4 GBMB.
Here are some helpful links for researching the database aspect of Author-it: