Until today, I have been using Ruby I installed manually on /usr/local/ (/usr/local/bin/ruby) because that's how I installed it on Mac OS X 4 Tiger. When I purchased Mac OS X 5 Leopard several days after it was released, I noticed that Ruby was installed under /usr (/usr/bin/ruby) as a part of Mac OS X developer tools. But I kept my .profile with "export PATH=/usr/local/bin:/usr/local/sbin:$PATH" because I had lots of gems installed already under the Ruby under /usr/local (/usr/local/lib/ruby).
Today as a part of updating to Ruby on Rails 2.0, I switched to use the Ruby included with Mac OS X developer tools (under /usr). And updated Rails gem under that location (under /user):
1. Commented out "export PATH=/usr/local/bin:/usr/local/sbin:$PATH" in my .profile. Restarted the shell.
2. Executed "gem update rails".