Connecting Ruby on Rails to Microsoft SQL Server
NOTE: These instructions are now seriously out of date. You may want to check out my always up to date *cheap* ebook instead. Connecting Ruby on Rails to Microsoft SQL Server eBook

It appears rails does not connect to MS SQL Server right out of the box. You need to do the following to get the connection to work:
Get the latest source distribution of Ruby-DBI and copy the file:
bdi-0.1.0/lib/dbd/ADO.rb
to:
c:/ruby/lib/ruby/site_ruby/1.8/DBD/ADO/ADO.rb
NOTE: The ADO directory does not exist on a standard install, you will need to create it.
Then simply set up your railsapp/config/database.yml
Here’s an example for reference:
development: adapter: sqlserver database: database_name host: server_name username: user_name password: your_pw_here