Can't connect to local Firebird with ISQL

As already mentioned in my comments the problem is caused by running the Firebird server as an application. Firebird has its password database (security2.fdb) in C:\Program Files\Firebird\Firebird_2_5. As this database is (almost, but not entirely) a normal Firebird database, the server requires write access to this database (for the transactions, etc).

By default (with UAC) users do not have write access to the password database, so this requires elevation to Administrator. So access to Firebird requires that you either run the application as a service with sufficient rights (eg as done by the default installer), or when running the server as application to run it 'As administrator'. Another option is to not install it in Program Files.

This BTW applies double when accessing the example employee database as this database file is also located in the Program Files folder.