1. Download the windows binaries for Ruby 1.8.7 here: http://www.ruby-lang.org/en/downloads/ extract that to wherever you would like, I use c:\ruby. Then put c:\ruby\bin in your PATH environment variable.
2. Download the zlib package: http://www.zlib.net/zlib123-dll.zip and extract the zlib1.dll, rename it to zlib.dll and move it into your Windows\System32.
3. Download the iconv package: http://sourceforge.net/project/showfiles.php?group_id=25167&package_id=51458. Find and extract the iconv.dll into your Windows\System32.
4. Download the rubygems package and follow the instructions, basically extracting the package and running ruby setup.rb
5. Verify that everything works properly by trying a gem install rails, once that installs then do: rails test_project