I have worked on several rails applications that experienced high load due to viral growth on Facebook.
Your mongrel count should be based on several factors. If your mongrels make API calls or deliver email and must wait for responses, then you should run as many as possible. Otherwise, try to maintain one mongrel per CPU core, with maybe a couple extra left over.
Make sure your server is using a Fair Proxy Balancer (not round robin). Here is the nginx module that does this: http://github.com/gnosek/nginx-upstream-fair/tree/master
And here are some other tips on improving and benchmarking your application performance to handle the load:
ActiveRecord
The most common problem Rails applications face is poor usage of ActiveRecord objects. It can be quite easy to make 100's of queries when only one is necessary. The easiest way to determine if this could be a problem with your application is to set up New Relic. After making a request to each major page on your site, take a look at the newrelic SQL overview. If you see a large number of very similar queries sequentially (select * from posts where id = 1, select * from posts where id = 2, select * from posts...) this may be a sign that you need to use a :include in one of your ActiveRecord calls.
Some other basic ActiveRecord tips (These are just the ones I can think of off the top of my head):
If you're not doing it already, make sure to correctly use indexes on your database tables.
Avoid making database calls in views, especially partials, it can be very easy to lose track of how much you are making database queries in views. Push all queries and calculations into your models or controllers.
Avoid making queries in iterators. Usually this can be done by using an :include.
Avoid having rails build ActiveRecord objects for large datasets as much as possible. When you make a call like Post.find(:all).size, a new class is instantiated for every Post in your database (and it could be a large query too). In this case you would want to use Post.count(:all), which will make a single fast query and return an integer without instantiating any objects.
Associations like User..has_many :objects
create both a user.objects
and user.object_ids
method. The latter skips instantiation of ActiveRecord objects and can be much faster. Especially when dealing with large numbers of objects this is a good way to speed things up.
Learn and use named_scope whenever possible. It will help you keep your code tiny and makes it much easier to have efficient queries.
External APIs & ActionMailer
As much as you can, do not make API calls to external services while handling a request. Your server will stop executing code until a response is received. Not only will this add to load times, but your mongrel will not be able to handle new requests.
If you absolutely must make external calls during a request, you will need to run as many mongrels as possible since you may run into a situation where many of them are waiting for an API response and not doing anything else. (This is a very common problem when building Facebook applications)
The same applies to sending emails in some cases. If you expect many users to sign up in a short period of time, be sure to benchmark the time it takes for ActionMailer to deliver a message. If it's not almost instantaneous then you should consider storing emails in your database an using a separate script to deliver them.
Tools like BackgroundRB have been created to solve this problem.
Caching
Here's a good guide on the different methods of caching in rails.
Benchmarking (Locating performance problems)
If you suspect a method may be slow, try benchmarking it in console. Here's an example:
>> Benchmark.measure { User.find(4).pending_invitations }
=> #<Benchmark::Tms:0x77934b4 @cutime=0.0, @label="", @total=0.0, @stime=0.0, @real=0.00199985504150391, @utime=0.0, @cstime=0.0>
Keep track of methods that are slow in your application. Those are the ones you want to avoid executing frequently. In some cases only the first call will be slow since Rails has a query cache. You can also cache the method yourself using Memoization.
NewRelic will also provide a nice overview of how long methods and SQL calls take to execute.
Good luck!