For anyone with a similar problem this might help.
Download sqlite3 from rubyforge.org.
Apparently on the latest version of sqlite3 which as of now, Feb 14th. '09, is 1.2.4 there is, so far, no binary of sqlite3-ruby 1.2.4 compiled for win 32. So you must install version 1.2.3 instead. It seems there is no practical difference between the two versions.
gem install sqlite3-ruby --version 1.2.3
I gleaned all of the above from a post on stackoverflow.com