Hi there,
Having spent several hours trying to work this out, I thought I'd just post it hear in case anyone else has any similar issues.
I found this great article here, which implied I could implement my idea:
http://www.telerik.com/community/code-library/aspnet-ajax/grid/manual-insert-update-delete-using-formtemplate-and-sql-backend.aspx
However, having set a handler for the OnUpdateCommand event (let's say RadGrid1_UpdateCommand), the flow would never enter into the handler when I clicked the Update button on my FormTemplate. As soon as I allowed EnableViewState again, it started working again - albeit with another caveat...
It seems that, even though I only wanted to allow EDIT on this particular RadGrid (ie NO Delete and NO Insert), I still had to enter stub handlers (ie DataGrid1_InsertCommand and DataGrid1_DeleteCommand) and declare them against the right events (ie OnInsertCommand and OnDeleteCommand).
I really wish this stuff was better documented! I nearly gave up on getting this to work. Not everyone uses DataSources, and the documentation is abysmal for people using decent Business Logic & Data Access Layers.
Thankfully, it's all working nicely now, but some better documentation would have helped in getting this sorted less painfully...