Learned this neat trick from the EngineYard guys. If you plan to scale, I would recommend having seperate Xen slices for your web, app, and database components. It was a life saver to be able to just move your database and app servers to seperate boxes when we needed to scale out.

Memory is critical. Yes, Rails is a little slow but application servers are trivial to scale. The database is virtually always going to be the hard bottle neck so you're going to want plenty of memory.