As suggested I upgraded Ruby to 1.8.4 along with Rails 1.1. My Linux boxes have been running 1.8.4 and haven't complained about my source. On the Windows version however, if you start to see errors like:
Invalid char `\002' in expression
parse error, unexpected tIDENTIFIER, expecting kEND
Go through your code and replace your tabs with spaces. I use EditPlus and you can configure the tabs to use spaces. This solved my problem.