<p>If I use restful_authentication in my ruby on rails app are passwords transfered between the broswer and the server in paintext? And if so how worried should I be about it?</p>

Well, you need to be worried if you are not hosting it over HTTPS... because if it is straight HTTP, then yes it is being passed in plaintext.
I don't know Rails specifically, but I'm pretty sure it has nothing to do with whether you host it via HTTP or HTTPS.
Edit: I found
this link
which apparently provides an example Rails app over HTTPS.
Further Edit: Here is
another link
discussing HTTPS with Rails.