I just installed ruby 1.8.7 on a Windows machine and when I started IRB I got this error:

ruby.exe Unable To Locate Component readline.dll

The fix:

1. Download the readline binary zip from here.
2. Unzip the file.
3. Change directory to the new directory created by unzipping the file.
4. Change directory to the bin directory.
5. Copy the readline5.dll file.
6. Change directory to your ruby/bin directory (for me this is C:\ruby\bin).
7. Paste readline5.dll file there.
8. Rename file readline.dll.

As long as your rubybin directory is set in your PATH environment variable, that should take care of the problem.