I have installed XAAMP on my win7 machine and I have the apache server/mysql running on there.
I set up rails to work with XAmpp as described here: XAMPP and RAILS
This tutorial advises you to add this code to the XAMPP httpd.connf :

Listen 3000
LoadModule rewrite_module modules/mod_rewrite.so
#################################
# RUBY SETUP
#################################
<virtualHost *:3000>
ServerName rails
DocumentRoot "c:/xampp/htdocs/FirstProject/public"
<Directory "c:/xampp/htdocs/FirstProject/public/">

Options ExecCGI FollowSymLinks
AllowOverride all
Allow from all
Order allow,deny
AddHandler cgi-script .cgi
AddHandler fastcgi-script .fcgi

</Directory>
</VirtualHost>
#################################
# RUBY SETUP
#################################

Xampp runs on the default localhost and mysql remains unchanged without a pw.

I created a rails app with a mysql database like this:
rails -d mysql C:/xampp/htdocs/FirstProject
Then I started the ruby script/server from within the FirstProject location
The localhost:3000/ shows the classic rails welcome

I then ran a basic scaffold command:

ruby script/generate scaffold FirstProject name:string email:string <br/>

When I run the rake db:migrate command I get the following error:

C:\xampp\htdocs\FirstProject>rake db:migrate --trace
(in C:/xampp/htdocs/FirstProject)
** Invoke db:migrate (first_time)
** Invoke environment (first_time)
** Execute environment
** Execute db:migrate
rake aborted!
undefined method `init' for Mysql:Class
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/mysql_adapter.rb:70:in `mysql_connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:223:in `send'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:223:in `new_connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:245:in `checkout_new_connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:188:in `checkout'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:184:in `loop'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:184:in `checkout'
C:/Ruby/lib/ruby/1.8/monitor.rb:242:in `synchronize'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:183:in `checkout'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:98:in `connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_pool.rb:326:in `retrieve_connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_specification.rb:123:in `retrieve_connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/connection_a
dapters/abstract/connection_specification.rb:115:in `connection'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/migration.rb
:435:in `initialize'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/migration.rb
:400:in `new'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/migration.rb
:400:in `up'
C:/Ruby/lib/ruby/gems/1.8/gems/activerecord-2.3.5/lib/active_record/migration.rb
:383:in `migrate'
C:/Ruby/lib/ruby/gems/1.8/gems/rails-2.3.5/lib/tasks/databases.rake:116
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:636:in `call'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:636:in `execute'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:631:in `each'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:631:in `execute'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:597:in `invoke_with_call_c
hain'
C:/Ruby/lib/ruby/1.8/monitor.rb:242:in `synchronize'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:590:in `invoke_with_call_c
hain'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:583:in `invoke'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2051:in `invoke_task'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2029:in `top_level'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2029:in `each'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2029:in `top_level'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2068:in `standard_exceptio
n_handling'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2023:in `top_level'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2001:in `run'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:2068:in `standard_exceptio
n_handling'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/lib/rake.rb:1998:in `run'
C:/Ruby/lib/ruby/gems/1.8/gems/rake-0.8.7/bin/rake:31
C:/Ruby/bin/rake:19:in `load'
C:/Ruby/bin/rake:19

Any idea on how to fix this?
Thanks in advance