Through my frustration of not finding the post-installation wizard with ArcSDE 10.1 and being unsuccessful with the command line tool to start an SDE service on our SDE databases, I found I was able to access the databases and copy/past/add features/delete features/etc. all through direct connections to our SQL Server 2012 machine. This was WITHOUT ArcSDE running.
So... The question is, why do I need to go through the trouble of trying to get the SDE services to run if I can manage our databases through the Desktop tools? I was even able to create an enterprise geodatabase and verified that all of the necessary business tables were created. I have even recreated all our map services in ArcGIS Server 10.1 with direct connect and the web editing is perfectly working.
Perhaps I'm missing something...
UPDATE:
As indicated in the What's New for Geodatabases topic:
"The recommended method to access enterprise geodatabases is to connect directly from ArcGIS clients. If you only use direct connections to your geodatabase, you do not have to install the ArcSDE application server."
If you need to edit settings in the ArcSDE system tables, though, you should still install the command line tools included with the application server. I don't think editing system tables directly through SQL is supported technically.
Answer
A very good discussion of whether to use ArcSDE or not can be found here.
At 10.1 there is no need to install the ArcSDE software unless you need to run an ArcSDE service. If all of your users are making Direct Connections to the geodatabase then the ArcSDE installation is not necessary. As well, most of the functionality offered by ArcSDE commands is now available in ArcGIS Desktop & through GP tools.
To make a long story short, the vast majority of ArcGIS 10.1 users no longer need ArcSDE to connect to an enterprise geodatabase. Direct Connection is now the default connection method.
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