As it turns out, his error is directly related to the 1.1 release. I can confirm this as well because after having updated from 1.0.1a to 1.1 I received an error when attempting to watch my SASS directory with Compass. My error was different, but I believe they're both related to the 1.1 release.
We collectively discovered two different errors:
1. DavidGillespie and NicoDemuz's error:
error myapp.scss (Line 24: Undefined mixin 'background-image'.)
Sass::SyntaxError on line ["24"] of u: Undefined mixin 'background-image'.
I found the referenced line 24 in /resources/themes/stylesheets/sencha-touch/default/_mixins.scss:
NoMethodError on line 9 of /Users/markwyner/Documents/Gigs/PriceBox/Site_Sencha/www/resources/sass/../themes/lib/theme_images.rb: undefined method `inline_image_string' for #<Sass::Script::Functions::EvaluationContext:0x1011f6bc8>
When I reverted to 1.0.1a and ran a watch I received no errors, so I can confirm my error is directly related to the new version. Line 9 of theme_images.rb in 1.1 reads: