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Datasheet View works for particular permission level only on my site i.e. Contribute Permissions Level only. How can I make it work for all permission levels?

PS: I have installed SP1 upgrade.

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I think you're missing the key point here. The datasheet view is not aware of you only having add or only update permissions. It enables you the ability to add as well as update and delete, erego you need the full contribute permissions in order to accomplish this task.

I have used tools like jqGrid with the client side object model to implement a rich client interface so this might be an alternative work around.

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