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After recreating database on my Host Server, do I have to delete both the database files (.mdf and log file) or what exactly ?
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It depends. If you want to use the live database during development, you don't need the files anymmore so you can delete them but you don't have to.
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Secondly, are there any changes need to be made to the web.config OTHER than the connection string ofcourse .. ?
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Again, it depends. You may want to change error handling, e-mail addresses and more. Check out chapter 18 for more details.
Cheers,
Imar