First, I would highly recommend that you update to at least ver. 2.8.There is a free update available on the UFT web site at www.uftree.com under UFT Software/Tech Services & FAQs/Downloads
The most recent version of UFT is 3.0.
Second, even with 2.8 you need an update to be able to use IE5.That update is also available on the download site. Follow the instructions carefully.After applying the update you will not have to run the browser set up as UFT will recognize your default browser.This was fixed in ver. 3.0 which is only available through purchase.