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Hi,
It sounds like you have ArcGIS Server Workgroup. Is that correct? If so, there isn't any ArcSDE to uninstall and reinstall, and you don't have to run the wizard to enable your SQL Server Express instance to store geodatabases; unless you are have an EDN or Education Site license, your existing license should still work.
After you've installed Desktop 10.1, you can use the Upgrade Geodatabase tool to upgrade your workgroup geodatabases to 10.1.
If I misinterpreted, and you're actually using ArcGIS Server Enterprise, then whether you install ArcSDE 10.1 depends on whether you use an ArcSDE service to connect to your geodatabases and/or if you use ArcSDE administration commands.