I can reproduce this. It wasn't what I thought. We use the SOH (0x01) char as a leader for side channel commands to the build window, and that's what's kicking in and mangling things.
I haven't thought of a workaround. Or a helpful command line program on windows you can pipe iarbuild through to strip the non-printable control characters before we see them. If you have one of the packages of unix command line tools for windows, it's probably doable with sed. Just stripping the 0x1 chars will still leave you with a uglier error regular expression, with file paths surrounded by "." and "0", but it should work.