I had a problem with MSDE setup and CF7 as well.  This turned out to be the 
solution for me, if it's any help. 
http://www.robisen.com/index.cfm?mode=entry&entry=BE1AB594-55DC-F2B1-F392552E0A41542A

The specific error I was getting when attempting to verify datasources in CF 
was:
 [Macromedia][SQLServer JDBC Driver]Error establishing socket. Connection 
refused: connect

>Frustrating, but at least it's set up now... now I'm dealing with a
>totally different problem, trying to set up an MSDE server on that
>machine and not having any luck... I was able to get it installed once
>but then couldn't connect to it with anything (MS SQL Enterprise
>Manager, CF, ODBC) except a 3rd party tool called MSDE Manager (from
>WhiteBear I think it was)... Good to know the thing was working, but
>completely unhelpful if I can't connect to it with CF... So I
>uninstalled it to try again and now I can't get it reinstalled...
><sigh>... just another day in freaking nothing works as advertised
>land...
>

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