'Setup failed to connect to database server'

The above error message indicates UpdateEXPERT's Settings Management component did not satisfy the SA authentication challenge from a Local SQL instance.

Allow the installation process to continue until it appears to be finished.  Then uninstall and re-install Settings Management, following these steps:

Using UpdateEXPERTDSN with UpdateEXPERT Premium 7.x

You may confirm proper installation by launching UpdateEXPERT, downloading one or more Security Templates and selecting SecurityEXPERT menu items that exercise SecurityEXPERT's web interface components.

Note that when running setup, a "Typical" install includes Settings Management by default, and that a "Custom" install allows de-selection of Settings Management, as well as Patch Management, if your intention is to install a Console only.