I've been using 6.06 with Rails since it came out, and it works fine
once you get all the bits installed. I can't recall the exact
details, but there was some messing around with packages in order to
get everything installed correctly. It didn't take long to resolve,
but it wasn't as simple as it could have been.
I've got a 7.04 box that I'll move to when I get around to it.
Either way, I don't think you'll have problems with Ubuntu and Rails.
I use Dapper, only because slicehost's installer has that version.
Dapper can install everything you need to run rails, but the ease of
it depends on your chosen deployment stack. Dapper's apt sources
doesn't include apache 2.2 which you'll need for proxying to mongrel,
so that has to be built from source. I'm pretty sure Feisty has apache
2.2 as a packaged installer.
deprec (gem install deprec) can build apache for you on Dapper, and it
works well.
It all depends on your deployment variant.
I developed on 6.10, now developing on 7.04, and the server is running
Debian 4.0.
My deployment solution is pound + mongrel_cluster.