Yeah people have gotten rails apps to work with rubyScript2Exe. But the thing is that your source code will still be available to your client. rubyScript2Exe creates a compressed archive with everything you need to run you app but when it runs it unpacks your source code into /tmp and then your client could just grab the source there. So there isn't a real way to obfuscate your ruby code at this point. You could always host the solution yourself and put a box at the clients location and not giving them root on it.
Yes it will be possible. But the byte code could be re-assembled to ruby if you wanted it enough. It would be pretty tough though. There is a cool cgi script on YARV author's website here: http://www.atdot.net/yc/ You can paste your ruby code and see what the bytecode looks like for YARV