just to clarify...you ran "gem update --system" by itself and not as
an option on your "gem install rails" command correct?

Also, try adding http://rubygems.org/ to your gem sources by running
the following command...

gem sources -a http://rubygems.org/

After that is run, try updating system again with...

gem update --system

and then try installing rails again with...

gem install rails -v  2.3.5

Hope this helps,
Bob

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