I started my application with linux 2.6, mongrel 1.1.6 (from http://gems.rubyinstaller.org/), mongrel_rails and rails 2.3.8 and was not able to use cookies...no logins, no authenticity form tokens, no nothing requiring cookie usage...basically no cookies are stored in the session at all which I confirmed in my browser.
Interestingly, if I startup with script/server, mongrel boots up and cookies work great.
Also, everything worked either way (mongrel_rails and script/server with mongrel) under rails 2.3.5.