I definatly should have read your opening post more carefully. I see 
that there's a difference between the error message in normal and 
elevated mode now, which is weird.

I would start by uninstalling Ruby and then reinstalling it into a 
directory without a space in the filename (like C:\ruby), then try to 
install rails using the same account as I installed ruby with, from an 
elevated command prompt.

If that makes no difference, see if you have the same problem with Ruby 
v1.8.6
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