Ok I followed the steps for setting up ruby and rails on my Vista machine and I am having a problem connecting to the database.
database.yml
I used and ODBC data source and the SQL Server adapter on Windows Server 2008 against SQL Server 2000 running on a remote instance.
Install SQL Server Adapter
gem.bat install activerecord-sqlserver-adapter
Successfully installed deprecated-2.0.1
Successfully installed dbi-0.4.1
Successfully installed dbd-odbc-0.2.4
Successfully installed activerecord-sqlserver-adapter-2.2.22
4 gems installed
Create an ODBC datasource
Setup database.yml
development:
adapter: sqlserver
mode: odbc
dsn: rails_development
username: sa
password: 12345
YMMV
A couple of helpful links: