Updating design template to SP1 removes code in Default Server Event

This is correct -- the Update Design Templates functionality is there to update existing processes to the new design templates, in which changes have been made. If you don't have any code you should update the design templates. Right-clicking on the canvas and selecting this option will allow you to update all of them in the process so you don't have to do them individually.

Of course if you have custom code, make a backup of that before you update the design templates. Then add it back in and test to make sure it peforms in the same way.

-Mike