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When a connection has issues, a CONNECTION_RETRY event is fired, but is CONNECTION_LOST fired at this time too? At what point does the CONNECTION_LOST event fire? When the single CONNECTION_RETRY attempt fails?

If you use the HRC system, the CONNECTION_LOST is fired if HRC is unable to re-establish a dropped connection. Otherwise a CONNECTION_RESUME will be fired.
In other words, with HRC "off" you get the CONNECTION_LOST event immediately.
With HRC "on" you get the CONNECTION_RETRY event followed by either CONNECTION_RESUME or CONNECTION_LOST, whether the connection was resumed successfully or not.

Thanks Paolo

If HRC is on and connection resume is successful, is the user still logged in like before? is his buddy list still in tact (does not need to be initialized again)

Yes, once you are reconnected you keep the same state as before and you will receive all the messages that were kept on the server side while you where away (messages, events etc...)

cheers