After some delay on this item, I managed to spend some time on my Ubuntu system.
As it turned out, the rails env was in fact broken due to my mistake. Many versions of rails/ruby installed over period of time. From Ubuntu package management system, from Rails, ruby website. Many versions of gems etc...
So, I had to do a bit of cleaning up. In fact a lot of cleaning up. Removed ruby from Ubuntu packages perspective altogether. All of it. Removed rails from Ubuntu packages as well.
Then I got the latest ruby source code from Ruby-Lang.org and did the basic compilation. Nothing had to be configured for ssl or anything else. It worked like a charm. Lovely.
However, if you have some system running in production on rails, you better read a bit more on rails 2 before migrating to it. I managed because I am still playing around, and nothing is really running that is of production value. :)
It has quite some changes that do NOT fit in with rails 1.2.3 regime. Some of them are here Whats new in Rails 2
good luck :)
btw, found two interesting blogs on rails... adding them to fav links...