I have the WiFly connected via hardware serial (Pins 1 & 2) and debugging going through software serial
Hardware serial is on pins 0 and 1, I guess you meant that.
Any ideas of what might be going on here?
What kind of software do you use? The WiFly library or do you communicate directly with the module? Can you show us your code?
I use the same combination and never experienced similar problems.
What does garbled mean? Are additional characters inserted, do characters get lost or ar some character turned into other ones? Can you show us examples of correct input and garbled output?