"the setup will detect your existing 10.1 or 10.1 SP1 of ArcGIS for Server on the target machine and prompt you to decide if you want to continue or exit the upgrade"
When we launched this it did not detect the current version and is trying to fire an new installation.
It detects the installation based on current user and hostname. If those have changed from when the previous version was installed, the new version will not be able to find the old one to upgrade.
Can you elaborate please? How is the Esri_Install_Directory the culprit? Does it have the wrong value or is it not getting set at all? Have you been able to fix your upgrade issue or do you still need assistance?