1) Is it a neccessary for the assignment to be able to change the database(from local to remote or vice-versa) on the fly?
No, it's not neccessary, -- the instructions are very explicit on that.
2) Does the db.db go with the client.jar or does it go with the server.jar?
The db.db will have to be extracted anyway, and since it is used in both local and remote modes, the logical place to put it would be the root of the submitted assignment jar.
Eugene.