(1) For this to work properly, first you need to install the DevKit.
Just download the executable from RubyInstaller and run it. For rails 2 choose 3.4.5 version.
If it’s installed on C:DevKit, for example, then follow the next steps:
cd C:DevKit
ruby dk.rb init
ruby dk.rb install
gem install rdiscount --platform=ruby
(2) Install the ruby-odbc gem for accessing ODBC data sources:
c:>gem install ruby-odbc
(3) Install the activerecord-sqlserver-adapter gem. Be sure to install the same version of your Rails framework. You have more info about it here.
c:>gem install activerecord-sqlserver-adapter --version=2.3.11
(4) Create an ODBC data source. If you’re running a 64 bit Windows System, don’t use the ODBC Administrator Tool from the Control Panel because a 64 bit ODBC data source won’t work. Instead, open the 32 bit ODBC Administrator Tool this way:
c:>cd C:WindowsSysWoW64
c:>odbcad32.exe
Select a default database on your DSN. Select English as the default language, although you’re not using English (I had problems with date formats using Spanish).
(5) Edit the config/database.yml configuration file:
development:
adapter: sqlserver
mode: ODBC
dsn: your-odbc-data-source-name
host: your-sql-server-host
username: an-sql-username
password: the-username-password
If you have any problems with Decimal numbers just change the decimal type to float on your migration files, and recreate your database.
Source: http://franciscojsaez.tumblr.com/post/4550243496/connecting-a-rails-app-on-windows-to-sql-server