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 too had faced this problem. There is another work around. You can create a DSN for the app db from control panel->admin tools->Odbc. Database.yml file should look like below:
adapter: sqlserver
mode: odbc
dsn: DSN_NAME
host: localhost
database: App_development
username: uname
password: password
I tried using the deprecated gem, wasn't of much use. I had tried installing an ADO adaptor too which rendered useless.