wtf?

gistfile1.eclass

# In a fresh Rails app created with `rails new`
# App runs fine at this point with `rails server`
$ cat Gemfile
source 'http://rubygems.org'
gem 'rails', '3.0.0'
gem 'sqlite3-ruby', :require => 'sqlite3'

$ bundle install
Using rake (0.8.7) 
Using abstract (1.0.0) 
Using activesupport (3.0.0) 
Using builder (2.1.2) 
Using i18n (0.4.2) 
Using activemodel (3.0.0) 
Using erubis (2.6.6) 
Using rack (1.2.2) 
Using rack-mount (0.6.13) 
Using rack-test (0.5.7) 
Using tzinfo (0.3.25) 
Using actionpack (3.0.0) 
Using mime-types (1.16) 
Using polyglot (0.3.1) 
Using treetop (1.4.9) 
Using mail (2.2.15) 
Using actionmailer (3.0.0) 
Using arel (1.0.1) 
Using activerecord (3.0.0) 
Using activeresource (3.0.0) 
Using bundler (1.0.10) 
Using thor (0.14.6) 
Using railties (3.0.0) 
Using rails (3.0.0) 
Using sqlite3 (1.3.3) 
Using sqlite3-ruby (1.3.3) 
Your bundle is complete! Use `bundle show [gemname]` to see where a bundled gem is installed.
$ rails server
Could not find i18n-0.4.2 in any of the sources
Try running `bundle install`.

Weirdness:
$ rails --version
Rails 3.0.0
$ gem list rails
rails (3.0.5, 3.0.3, 3.0.0)

Fixed with:
$ sudo gem uninstall rails
Selected 'Uninstall all'
$ sudo gem install rails