This should be an easy one to fix. I tried using the URL for the jTDS and MSSQL JDBC drivers but neither worked, so I googled around and luckily found someone else who had this problem:
http://web-moshpit.blogspot.com/2008/01/squirrel-sql-microsoft-sql-server-2005.html
The proper URL is jdbc:sqlserver://<server_name>:<1433>;databaseName=<db_name>
but the example displayed when you add an alias is jdbc:microsoft:sqlserver://<server_name>:<1433>
I also had to add the MSSQL and jTDS jars to the driver properties' classpath or it would not load (mainly griping about not being to find the class for the MS driver), so that probably needs to be added to the FAQ or instructions as well...
Fixed in CVS. The change will be available in the next snapshot.