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Is it possible to have sql database and ArcSDE database running on the same server - virtual machine? What are the benefits? What are the negatives?

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As long as they are both .mdf files there shouldn't be any issue. Althought, ArcSDE is middle-ware, so you never query the SQL server directly, only through ArcSDE. (I might be wrong on that, you could also check out gis.stackexchange.com)

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