sudo gem update --system

With Ubuntu (my version is Gutsy at the time of this writing), you will run with the problem

“uninitialized constant Gem::GemRunner (NameError)”

Take a look at http://www.nickpeters.net/2007/12/31/fix-for-uninitialized-constant-gemgemrunner-nameerror/ for the solution. I did a

sudo cp /usr/bin/gem1.8 /usr/bin/gem

You'll need the latest version of rubygems for Rails 2.0.