Ruby and Rails on Leopard

You are pretty much on your won updating to 1.2.5 right now, which for
me and my app seems to break a few things. However, if you so
desperately need to upgrade rails...

first off, are you just upgrading rails? Or using gem update --system?
Have you tried using --no-doc --no-ri?

I have not attempted to update to 1.2.5 and don't plan to right away.
So I don't know how much help I can be.

After a little reading,

The problem is that RDoc empties the output directory, but
leaves the directory itself there. RDoc doesn't like putting
documentation into an empty directory, because it doesn't want to
clobber someone else's space. It wants to create the directory
itself, or
at least find a "created.rid" file there.

my advice, manually remove the directory and try again. Or use the
--no-doc switch.

Hope that helps.

I just did a "sudo gem update"

(this is on a non-production, critical, system - I was just testing to
see how it's all going to work.)

I'd guess since the update it putting the updated gems into a separate
directory, from the system installed gems, that may be the problem.
I'll try with the --no-doc switch and see what happens.