The solution is to uninstall Rails (Currently 2.0.2 is the latest release), so anything > 2.0.2 should be removed.
Remove all versions > 2.0.2 (or latest release) of rails (or all other versions if you don’t use them)
sudo gem uninstall rails
Make sure the source is pointing to “http://gems.rubyforge.org/” by running gem source. If it is pointing to “http://gems.rubyonrails.org”, remove it by typing the following:
sudo gem remove -r “http://gems.rubyonrails.org”
To install the latest release version run:
sudo gem install rails -v 2.0.2
Remember to recreate your rails project for any new projects as they create files that cause problems. For older projects, just making sure the right version is installed should work.