Don't use the Base64 library. It's not found in ruby 1.9.

lib/compass/sass_extensions/functions/inline_image.rb

@@ -1,4 +1,3 @@
-require 'base64'
 module Compass::SassExtensions::Functions::InlineImage
 
   def inline_image(path, mime_type = nil)
@@ -47,7 +46,7 @@ private
 
   def data(real_path)
     if File.readable?(real_path)
-      Base64.encode64(File.read(real_path)).gsub("\n","")
+      [File.read(real_path)].pack('m').gsub("\n","")
     else
       raise Compass::Error, "File not found or cannot be read: #{real_path}"
     end