perhaps I did it backwards but I upgraded rails before rubygems but it should work but doesn't. (I've since done a gem cleanup)
In a brand new rails directory...
$ script/server --trace ./script/../config/boot.rb:29: undefined method `gem' for main:Object (NoMethodError) from script/server:2:in `require' from script/server:2
$ gem list
*** LOCAL GEMS ***
actionmailer (1.3.3) Service layer for easy email delivery and testing.
actionpack (1.13.3) Web-flow and rendering framework putting the VC in MVC.
actionwebservice (1.2.3) Web service support for Action Pack.
activerecord (1.15.3) Implements the ActiveRecord pattern for ORM.
activesupport (1.4.2) Support and utility classes used by the Rails framework.
hoe (1.2.0) Hoe is a way to write Rakefiles much easier and cleaner.
paginator (1.0.9) A generic paginator object for use in any Ruby program
postgres (0.7.1) The extension library to access a PostgreSQL database from Ruby.
rails (1.2.3) Web-application framework with template engine, control-flow layer, and ORM.
rake (0.7.2) Ruby based make-like utility.
rmagick (1.15.5) RMagick is an interface between the Ruby programming language and the ImageMagick and GraphicsMagick image processing libraries.
rubyforge (0.4.1) A simplistic script which automates a limited set of rubyforge operations
rubygems-update (0.9.2) RubyGems Update GEM
sources (0.0.1) This package provides download sources for remote gem installation
this should be simple but nothing on the net has helped me solve it.