I\'ve had problems with autotest before which I resolved by downgrading from ZenTest 4.1.4 to 4.1.3.
$ ruby -v ruby 1.8.7 (2008-08-11 patchlevel 72) [univers
I struggled with this too. It looks like Rails support was removed from the core autotest library and moved into it's own gem. gem install autotest-rails seems to get everything working for me.
gem install autotest-rails