Have you tried jQuery.noConflict()? I'm running a Rails 3 rc app with both Prototype and jQuery using the no conflict function - the jQuery bit is working fine, not too sure about Prototype at the moment though.
Add jQuery.noConflict(); to your application.js file - that gives control of the $ call back to Prototype, so jQuery calls have to be tagged with 'jQuery', rather than '$' eg. jQuery.getJSON instead of $.getJSON. Alternatively, you could define a variable: var $j = jQuery.noConflict(); - the previous example would then become $j.getJSON. Finally, you can also keep jQuery code with $ whilst using jQuery.noConflict() by wrapping it in another function:
(function($) {
//your code in here
})(jQuery);