diff --git a/Rakefile b/Rakefile
index 5d108b7d79e..def5ef3cc0a 100644
--- a/Rakefile
+++ b/Rakefile
@@ -37,6 +37,19 @@ else
   end
 end
 
+namespace :spec do
+  file "tmp/rg_deps" do
+    repo = File.dirname(__FILE__) + '/tmp/rg_deps'
+    FileUtils.mkdir_p(repo)
+    p repo
+    ENV['GEM_HOME'], ENV['GEM_PATH'] = repo, repo
+    system "gem install builder --no-rdoc --no-ri"
+  end
+
+  desc "Do all setup needed to run the specs"
+  task :setup => "tmp/rg_deps"
+end
+
 begin
   require 'rake/gempackagetask'
 rescue LoadError
diff --git a/lib/bundler/bundle.rb b/lib/bundler/bundle.rb
index 62b8210c028..ae2f306e5ab 100644
--- a/lib/bundler/bundle.rb
+++ b/lib/bundler/bundle.rb
@@ -29,18 +29,6 @@ def install(options = {})
       if only_envs = options[:only]
         dependencies.reject! { |d| !only_envs.any? {|env| d.in?(env) } }
       end
-
-      no_bundle = dependencies.map do |dep|
-        dep.source == SystemGemSource.instance && dep.name
-      end.compact
-
-      update = options[:update]
-      cached = options[:cached]
-
-      options[:rubygems]    = @environment.rubygems
-      options[:system_gems] = @environment.system_gems
-      options[:manifest]    = @environment.filename
-      options[:no_bundle]   = no_bundle
       # ==========
 
       # TODO: clean this up
@@ -49,12 +37,6 @@ def install(options = {})
         s.local = options[:cached]
       end
 
-      source_requirements = {}
-      dependencies = dependencies.map do |dep|
-        source_requirements[dep.name] = dep.source if dep.source
-        dep.to_gem_dependency
-      end
-
       # Check to see whether the existing cache meets all the requirements
       begin
         valid = nil
@@ -68,7 +50,7 @@ def install(options = {})
       # or the user passed --update
       if options[:update] || !valid
         Bundler.logger.info "Calculating dependencies..."
-        bundle = Resolver.resolve(dependencies, [@cache] + sources, source_requirements)
+        bundle = Resolver.resolve(dependencies, [@cache] + sources)
         download(bundle, options)
         do_install(bundle, options)
         valid = bundle
@@ -167,14 +149,14 @@ def only_local(sources)
 
     def download(bundle, options)
       bundle.sort_by {|s| s.full_name.downcase }.each do |spec|
-        next if options[:no_bundle].include?(spec.name)
+        next if spec.no_bundle?
         spec.source.download(spec)
       end
     end
 
     def do_install(bundle, options)
       bundle.each do |spec|
-        next if options[:no_bundle].include?(spec.name)
+        next if spec.no_bundle?
         spec.loaded_from = @specs_path.join("#{spec.full_name}.gemspec")
         # Do nothing if the gem is already expanded
         next if @gems_path.join(spec.full_name).directory?
@@ -190,7 +172,7 @@ def do_install(bundle, options)
 
     def generate_bins(bundle, options)
       bundle.each do |spec|
-        next if options[:no_bundle].include?(spec.name)
+        next if spec.no_bundle?
         # HAX -- Generate the bin
         bin_dir = @bindir
         path    = @path
diff --git a/lib/bundler/dependency.rb b/lib/bundler/dependency.rb
index d89182fdd8f..6899c28e464 100644
--- a/lib/bundler/dependency.rb
+++ b/lib/bundler/dependency.rb
@@ -1,7 +1,7 @@
 module Bundler
   class InvalidEnvironmentName < StandardError; end
 
-  class Dependency
+  class Dependency < Gem::Dependency
     attr_reader :name, :version, :require_as, :only, :except
     attr_accessor :source
 
@@ -10,8 +10,8 @@ def initialize(name, options = {}, &block)
         options[k.to_s] = v
       end
 
-      @name       = name
-      @version    = options["version"] || ">= 0"
+      super(name, options["version"] || ">= 0")
+
       @require_as = options["require_as"]
       @only       = options["only"]
       @except     = options["except"]
@@ -31,10 +31,6 @@ def in?(environment)
       true
     end
 
-    def to_s
-      to_gem_dependency.to_s
-    end
-
     def require_env(environment)
       return unless in?(environment)
 
@@ -51,8 +47,8 @@ def require_env(environment)
       @block.call if @block
     end
 
-    def to_gem_dependency
-      @gem_dep ||= Gem::Dependency.new(name, version)
+    def no_bundle?
+      source == SystemGemSource.instance
     end
 
     def ==(o)
@@ -60,5 +56,7 @@ def ==(o)
         [o.name, o.version, o.require_as, o.only, o.except]
     end
 
+    alias version version_requirements
+
   end
 end
diff --git a/lib/bundler/environment.rb b/lib/bundler/environment.rb
index c5c0d5c27c7..c43ab5f40a4 100644
--- a/lib/bundler/environment.rb
+++ b/lib/bundler/environment.rb
@@ -70,6 +70,9 @@ def gem_dependencies
       @gem_dependencies ||= dependencies.map { |d| d.to_gem_dependency }
     end
 
+    alias rubygems? rubygems
+    alias system_gems? system_gems
+
   private
 
     def default_sources
@@ -83,9 +86,9 @@ def repository
     def load_paths_for_specs(specs, options)
       load_paths = []
       specs.each do |spec|
-        next if options[:no_bundle].include?(spec.name)
+        next if spec.no_bundle?
         full_gem_path = Pathname.new(spec.full_gem_path)
-        
+
         load_paths << load_path_for(full_gem_path, spec.bindir) if spec.bindir
         spec.require_paths.each do |path|
           load_paths << load_path_for(full_gem_path, path)
diff --git a/lib/bundler/gem_ext.rb b/lib/bundler/gem_ext.rb
index c43c90a8ea7..707f582608d 100644
--- a/lib/bundler/gem_ext.rb
+++ b/lib/bundler/gem_ext.rb
@@ -11,8 +11,9 @@ def app_script_text(bin_file_name)
   end
 
   class Specification
-    attr_accessor :source
-    attr_accessor :location
+    attr_accessor :source, :location, :no_bundle
+
+    alias no_bundle? no_bundle
 
     remove_method(:specification_version) if method_defined?(:specification_version)
 
diff --git a/lib/bundler/resolver.rb b/lib/bundler/resolver.rb
index 2ad9cc2c2fa..7c3ba779383 100644
--- a/lib/bundler/resolver.rb
+++ b/lib/bundler/resolver.rb
@@ -36,7 +36,14 @@ class Resolver
     # ==== Returns
     # <GemBundle>,nil:: If the list of dependencies can be resolved, a
     #   collection of gemspecs is returned. Otherwise, nil is returned.
-    def self.resolve(requirements, sources, source_requirements = {})
+    def self.resolve(requirements, sources)
+      source_requirements = {}
+
+      requirements.each do |r|
+        next unless r.source
+        source_requirements[r.name] = r.source
+      end
+
       resolver = new(sources, source_requirements)
       result = catch(:success) do
         resolver.resolve(requirements, {})
@@ -54,6 +61,7 @@ def self.resolve(requirements, sources, source_requirements = {})
         # a smaller index in the array.
         ordered = []
         result.values.each do |spec1|
+          spec1.no_bundle = true if source_requirements[spec1.name] == SystemGemSource.instance
           index = nil
           place = ordered.detect do |spec2|
             spec1.dependencies.any? { |d| d.name == spec2.name }
diff --git a/lib/bundler/templates/environment.erb b/lib/bundler/templates/environment.erb
index 4edacacc143..0a25eb0253d 100644
--- a/lib/bundler/templates/environment.erb
+++ b/lib/bundler/templates/environment.erb
@@ -3,7 +3,7 @@ module Bundler
  file = File.expand_path(__FILE__)
  dir = File.dirname(file)
 
-<% unless options[:system_gems] -%>
+<% unless system_gems? -%>
   ENV["GEM_HOME"] = dir
   ENV["GEM_PATH"] = dir
 
@@ -25,12 +25,12 @@ module Bundler
 
   @gemfile = "#{dir}/<%= filename %>"
 
-<% if options[:rubygems] -%>
+<% if rubygems? -%>
   require "rubygems" unless respond_to?(:gem) # 1.9 already has RubyGems loaded
 
   @bundled_specs = {}
 <% specs.each do |spec| -%>
-<% if options[:no_bundle].include?(spec.name) -%>
+<% if spec.no_bundle? -%>
   gem "<%= spec.name %>", "<%= spec.version %>"
 <% else -%>
 <% path = spec_file_for(spec) -%>
@@ -108,7 +108,7 @@ module Bundler
   end
 end
 
-<% if options[:rubygems] -%>
+<% if rubygems? -%>
 module Gem
   @loaded_stacks = Hash.new { |h,k| h[k] = [] }
 
diff --git a/spec/bundler/manifest_file_spec.rb b/spec/bundler/manifest_file_spec.rb
index 45c20df6fc1..8b3d43702c1 100644
--- a/spec/bundler/manifest_file_spec.rb
+++ b/spec/bundler/manifest_file_spec.rb
@@ -41,10 +41,10 @@ def works
   end
 
   it "sets the default bundle path to vendor/gems" do
-    @manifest.gem_path.should_not exist
+    @manifest.gem_path.join('environment.rb').should_not exist
     goto :app
     bundle
-    @manifest.gem_path.should exist
+    @manifest.gem_path.join('environment.rb').should exist
   end
 
   it "allows setting the bundle path in the manifest file" do
diff --git a/spec/bundler/manifest_spec.rb b/spec/bundler/manifest_spec.rb
index e57646cbecb..2f50e6e6b71 100644
--- a/spec/bundler/manifest_spec.rb
+++ b/spec/bundler/manifest_spec.rb
@@ -104,14 +104,16 @@
   describe "runtime" do
 
     it "is able to work system gems" do
-      install_manifest <<-Gemfile
-        clear_sources
-        source "file://#{gem_repo1}"
-        gem "rack"
-      Gemfile
+      system_gems "rake-0.8.7" do
+        install_manifest <<-Gemfile
+          clear_sources
+          source "file://#{gem_repo1}"
+          gem "rack"
+        Gemfile
 
-      out = run_in_context "require 'rake' ; puts Rake"
-      out.should == "Rake"
+        out = run_in_context "require 'rake' ; puts RAKE"
+        out.should == "0.8.7"
+      end
     end
 
     it "it does not work with system gems if system gems have been disabled" do
diff --git a/spec/spec_helper.rb b/spec/spec_helper.rb
index 89c1c791038..5ec2d19d6fb 100644
--- a/spec/spec_helper.rb
+++ b/spec/spec_helper.rb
@@ -1,21 +1,23 @@
 $:.unshift File.expand_path(File.join(File.dirname(__FILE__)))
 $:.unshift File.expand_path(File.join(File.dirname(__FILE__), '..', 'lib'))
+
 require "pp"
 require "rubygems"
 require "bundler"
 require "spec"
 require "rbconfig"
 
+Gem.clear_paths
+
+root = File.expand_path("../..", __FILE__)
+FileUtils.rm_rf("#{root}/tmp/repos")
+`rake -f #{root}/Rakefile spec:setup`
+ENV['GEM_HOME'], ENV['GEM_PATH'] = "#{root}/tmp/rg_deps", "#{root}/tmp/rg_deps"
+
 Dir[File.join(File.dirname(__FILE__), 'support', '*.rb')].each do |file|
   require file
 end
 
-tmpdir = File.expand_path('../../tmp', __FILE__)
-FileUtils.mkdir_p(tmpdir) unless File.exist?(tmpdir)
-Dir["#{tmpdir}/*"].each do |file|
-  FileUtils.rm_rf file
-end
-
 Spec::Runner.configure do |config|
   config.include Spec::Builders
   config.include Spec::Matchers
diff --git a/spec/support/builders.rb b/spec/support/builders.rb
index d46e2c11fe9..a45dddb1352 100644
--- a/spec/support/builders.rb
+++ b/spec/support/builders.rb
@@ -125,7 +125,7 @@ def build_spec(name, version, platform = nil, &block)
     end
 
     def build_dep(name, requirements = Gem::Requirement.default, type = :runtime)
-      Gem::Dependency.new(name, requirements, type)
+      Bundler::Dependency.new(name, :version => requirements)
     end
 
     def build_lib(name, *args, &blk)
diff --git a/spec/support/helpers.rb b/spec/support/helpers.rb
index d1e072c7e76..3fd866738e8 100644
--- a/spec/support/helpers.rb
+++ b/spec/support/helpers.rb
@@ -118,7 +118,8 @@ def system_gems(*gems)
 
     def reset!
       Dir["#{tmp_path}/*"].each do |file|
-        FileUtils.rm_rf(file) unless File.basename(file) == "repos"
+        next if %w(repos rg_deps).include?(File.basename(file))
+        FileUtils.rm_rf(file)
       end
       FileUtils.mkdir_p(tmp_path)
     end