Upgrading to Mountain Lion will wipe your old dev environment, so this is what you'll need to get back to work on ree-1.8.7:
1. Install XCode command-line tools. Available from the Preferences > Download panel in XCode, or as a separate download from the Apple Developer site.
2. Install gcc-4.2. REE doesn't play well with Apple's LLVM compiler, so you'll need to install the old gcc-4.2 compiler. It's available in the homebrew homebrew/dupes repository.
brew tap homebrew/dupes
brew install apple-gcc42
3. Install xquartz. The OS X upgrade will also remove your old X11.app installation, so go grab xquartz from http://xquartz.macosforge.org/landing/ and install it (you'll need v2.7.2 or later for Mountain Lion).
4. Install ree. Remember to add the path to the xquartz X11 includes in CPPFLAGS and the path to gcc-42 in CC. Here I'm using rbenv, but the same environment variables should work for rvm.
rbenv install ree-1.8.7-2012.02