Based on this page:

http://wiki.rubyonrails.com/rails/pages/HowtoConnectToMicrosoftSQLServer

using his specification

development:
  adapter: sqlserver
  database: database_name
  host: server_name
  username: user_name
  password: your_pw_here

in database.yml for your SQL Server connection doesn't work.  Some debugging code reveals that only the password comes
through into sqlserver_adapter.rb when you use it.  I'm not sure why.

However, this seems to work:

development:
  adapter:  sqlserver
  database: database_name
  host: DBI:ADO:Provider=SQLOLEDB;Data Source=localhost,1692                                 
  username: user_name
  password: your_pw_here

Platform:
Windows XP Professional
Rails 1.8.2 
DBI 0.2
ADO 0.1