CANNT-GET-IT-WORKING

I have installed XPE w SP2 yesterday on single computer. Ihave copied XP System builder files onto same computer (specifically I have placed both files in newly created folder on desktop). After launching it and selecting i386 folder of my nLited WinXP dir, I get an error message "Cannt connect to SQl server...". Of course, SQL DE is running, I can open XPE Databaze manager and play with components...
I get this error no matter what databaze name I chose - MantisSQLDB or MantisSQLDBEval.
SF, do you have any clue of what could be wrong?