I currently have SQL Express 2008 R2 installed and would like to install ArcSDE for Microsoft SQL Server Express 2008. When the install gets to the point where it asks for the servername\instance it won't detect a SQL instance and throws the error. [ATTACH=CONFIG]12406[/ATTACH] The SQL server is operating normally and the default instance name of sqlexpress is indeed correct as other apps are using it. I spoke to support who had me uninstall SQL from a test machine and re-install the regular 2008 version from the Arc10 disks which fixed the issue.
However, I'm hoping someone might have a less painful fix than having to remove/add SQL on every computer where this is needed.
Just found the issue. When launching the install from the splash screen off the disc it will run the installer that matches your OS (x64 or x32). These systems are x64 Win 7 with x32 SQL (as it was needed for other apps). Browsing the disc to the x32 folder and running that install does the trick.