Along with upgrading Rails to 2.1 (which I did successfully), I also
looked into upgrading Ruby from 1.8.5 to 1.8.6 (again on my Windows XP
machine), I came across this thread suggesting a workaround
-----------
    There’s no ruby update AFAIK. You can work around this by renaming
c:\ruby to something else, installing ruby, then overwrite C:\ruby\lib
\ruby\gems with the old version and call ‘gem update’ to fetch the new
versions.
-----------

After some investigation, I decided against it for the following
reasons.
   1. There is at least one new gem in Ruby 1.8.6, hpricot, that is
not in 1.8.5, so the above workaround would lose hpricot.
   2. c:\ruby\lib\ruby\gems (for the current Ruby 1.8.5) also include
all of Rails 1.2.3 gems. Although it seems like gem update would also
update Rails (presumably to 2.1), I am not comfortable that something
isn’t missing, could be unjustified paranoia but I am not taking any
chances.
   3. I use HTree which as it turns out is not installed as a gem, the
author didn’t bother to package it as a gem and instead uses Ruby 3rd
party extension / library mechanism instead meaning that it is
installed under c:\ruby\lib\ruby\site_ruby instead of c:\ruby\lib\ruby
\gems. The above workaround does not take this into account.

So I decided to stick with Ruby 1.8.5 since Rails 2.1 runs on it. If
anyone else has a more successful experience, please share.