I think it might be an authentication issue. It looks like the wizard is failing to create the SQL database.
The command that creates the database from the 'Create Rails' wizard is output to the VS Output window. The code looks something like this:
if (f.Password == "") {
p.StartInfo.Arguments = String.Format(@"/S /C """"{0}\sqlcmd.exe\"" -S{1} -i""{2}"" -U{3} -b -v databaseName=""{4}_{5}"" & echo %errorlevel%""", sqlCmdPath, f.Host, sqlFile, f.UserName, f.DatabaseName, dbType);
} else {
p.StartInfo.Arguments = String.Format(@"/S /C """"{0}\sqlcmd.exe"" -S{1} -i""{2}"" -U{3} -P{4} -b -v databaseName=""{5}_{6}"" && exit 0""", sqlCmdPath, f.Host, sqlFile, f.UserName, f.Password, f.DatabaseName, dbType);
}
and you should see the string that sqlcmd tried to execute in the Output window prefixed by "/S /C". The way I normally test/troubleshoot issues like these is to copy the string and paste it into a command prompt (aka DOS box), remove the /S/C and extra quotes and try running it.
You should get the same error messages as before. Then I try and edit the command line and what it until it works. This elimiates all of the interaction between wizards and so on.
The actual SQL script that creates the SQL database is in C:\ProgramData\SapphireSteel Software\Ruby In Steel 2010\Scripts\sqlserver.sql. It might be that something needs to be modified in there.
In any event, you can always work round this problem by creating a Rails app with SQL Express and then editing the database yaml file to point to the SQL database that you want to use. The Rails app doesn't care once its been created - it just uses the parameter in the yaml file to connect to the database.
Try the above and see if you can find the cause to the problem and if you cant try editing the yaml file.
Dermot