ArcSDE Workgroup will only work with SQL Server Express.
You can either use the SQL Server Express 2008 R2 provided along with the sde setup OR download/install any desired (supported) version of SQL Server Express from Microsoft's site and use it as well.
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However, if you have to use SQL Server Standard edition (the SQL Server express has database size limits)......then you need an ArcSDE Enterprise license for that.