Setting up Rails and Ruby to use MS SQL server was always painful task. Fortunately things have changed - a lot! With new Rails SQL Server 2000, 2005 and 2008 Adapter and Christian Werner’s ruby-odbc gem you can do it in a few minutes.
If you want to use these gems on Windows grab Ruby installation from RubyInstaller site and be sure to install DevKit prior to installing ruby-odbc.
Versions of ruby-odbc before 0.9999 do not work on mingw based (RubyInstaller) Ruby. Luckily author was very fast and made new version very quickly after I sent him a patch. Thanks Christian!
Both gems work well on Ruby 1.8.6 and 1.9.1 Ruby versions on Windows with old ActiveRecords, but I hope rails adapter will be ported to ActiveRecords 3 soon.