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Connecting to an ArcSDE geodatabase using Direct Connect may result in the following error:
"Failed to connect to the specified server.
This SDE server does not support this client or operation."
This error occurs when attempting to open or test a Spatial Database Connection between ArcGIS 9.x and a previous version of ArcSDE 9.x. When using Direct Connect, the libraries that perform the connection are supplied by the client application. This is in contrast to a standard 3-tier connection, where the libraries that perform the connection are provided by ArcSDE. The client libraries must be at the same version as ArcSDE for Direct Connect to work; therefore, Direct Connect is only supported for configurations where the client application and ArcSDE are at the same version.
Upgrade the ArcSDE server version to the same version as the ArcGIS client.