I finally managed to re-enable mod_ruby on my server once again. This time around, I had a hard time enabling eRuby to work in Apache.
New Apache configuration file:
The Apache eRuby SetHandler (rhtml) was not able to render any html/ruby pages, while regular ruby scripts (.*rb) were able to run just fine.
Apache log error:
[Sun Aug 08 20:56:15 2010] [error] mod_ruby: (eval):45: (eval):45: uninitialized constant Apache::ERubyRun (NameError)
FIX:
Specify the absolute path to the eRuby Apache module in /usr/lib/ruby/1.8/apache/eruby-run.rb.
Change  line 45
require ‘eruby’
to
require “/usr/lib/ruby/1.8/i386-linux/eruby.so”
Restart Apache and eRuby should render html/ruby pages as expected.
I hope people find this useful (and save a headache) as I spent about 5 hours researching this problem and I wasn’t able to find this fix anywhere.