We have seen a number of issues with users installing UT2 version 2.5.115 (SQL Server 2005 Edition) in Window Vista and Windows 7.
Background: UT2 was developed during the Windows XP Pro era when most UT2 users had administrator permission on their PCs. The UT2 requires administrator permission to interact with SQL Server. Now, with Vista and Windows 7's modified security model it is tougher to interact with SQL Server unless you elevate your permission by running as administrator.
If you see the "failed to connect" error, then right click on the "Universal Translator 2" icon and select "Run as administrator".