After installing the rails 2.0 preview release, I created a fresh app with the rails command and noticed that environment.rb is still requiring gem version 1.2.3. Looking at my installed gems I could see that the 2.0 preview is still technically 1.2.3:
$: gem list | grep rails
rails (1.2.3.7707, 1.2.3, ...
This was causing a problem since it was breaking my other sites that were expecting the "old" 1.2.3. To fix it in those sites, I altered this line in environment.rb:
RAILS_GEM_VERSION = '1.2.3'
to this:
RAILS_GEM_VERSION = '1.2.3.0'
It seems to be including the proper gems for those sites now.