I got it to work with REE yesterday.
I must say, I've been playing around with all kinds of RoR setups over the years and this one actually feels great! In fact, it's so good we're developing a plugin for DA dedicated to mod_rails setups. Probably for internal use only, but who knows...
The great thing about it is that it's an Apache module. You won't need any other webserver than Apache, which is great as most DA users already run Apache. Passenger (combined with REE) will thus not only increase the speed of your RoR setup alone (take a look at the benchmarks), it will increase overall server performance (at least, I think it will).
Apart from that, the usability is great. You will never again have to start up an application, but simply upload your new files and issue a restart (touch tmp/restart.txt), which is much easier than the Mongrel/FastCGI approach.
The downside is that it's not as DA-friendly as I would have hoped. Well, actually, DA is not as RoR-friendly as I would have hoped. This is the first time I installed RoR on a server running DA and I've had some hick ups in the process. For example, you will need to edit the Virtualhost configuration to set your base URI and determine the mode your application is running in, which can normally not be done by users. Of course, an admin can add the appropriate lines to the user's httpd.conf from within DA (the only way DA will not overwrite it on updating), but you will not want the admin to have to set these things. Besides that, you also might want to change the documentroot to be able to launch your website from "/" without having to mess around with .htaccess. DirectAdmin prevents these kinds of changes in the user's httpd.conf.
But when I got it all to work, I was very pleased with the end result and I will most certainly consider using this setup as our main RoR development platform.