Rubies are fairly rare items found deep underground in the bottom 30 layers of the map. They will be found in branches of 3-10. They require an Iron Pickaxe or better to collect.
Rubies can be crafted to make Ruby tools, which are in-between Iron and Diamonds. Ruby tools have 752 uses before breaking and will mine 1.4x faster than Iron tools. They can also be traded to Villagers. They were supposed to be added in 1.3.2, but were replaced by emeralds.