Using SQL Server 2005 with Rails 1.2.6, I got the following (less than helpful) error message.
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OLE error code:80004005 in Microsoft OLE DB Provider for SQL Server
[DBNETLIB][ConnectionOpen (Connect()).]SQL Server does not exist or access denied.
HRESULT error code:0x80020009
Exception occurred.
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database.yml:
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development:
adapter: sqlserver
database: some_database
host: my_machine.local
username: some_username
password: some_password
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The Rails driver does this (modified to work in irb):
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require 'DBI'
require 'c:\ruby\lib\ruby\site_ruby\1.8\DBD\ADO\ado.rb'
ado = DBI::DBD::ADO::Driver.new
ado.connect( dbname, user, auth, attr )
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dbname is misleading here for two reasons. First, Rails passes in a connection string. Second, the ADO driver uses it as an odbc name instead of as a host name, etc. The contents of dbname looked like this:
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Provider=SQLOLEDB;Data Source=my_machine.local;Initial Catalog=some_database;User Id=some_username;Password=some_password;
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THE SOLUTION
In my case, the local SQL Server installation uses a named instance, as opposed to a default instance. I copied the 'server name' field from the login dialog in Sql Server Management Studio, and that worked.