rails command not working in mountable engine root directory

Question

Question regarding mountable engines on rails. First of all these are the versions I am using;

$ rails -v
  Rails 3.2.1
$ ruby -v
  ruby 1.8.7 (2010-01-10 patchlevel 249) [universal-darwin11.0]

I create the mountable engine with this:

$ rails plugin new testEngine --mountable
  create  
  create  README.rdoc
  create  Rakefile
  create  testEngine.gtestEnginepec
  create  MIT-LICENSE
  create  .gitignore
  create  Gemfile
  create  app
  create  app/controllers/testEngine/application_controller.rb
  create  app/helpers/testEngine/application_helper.rb
  create  app/mailers
  create  app/models
  create  app/views/layouts/testEngine/application.html.erb
  create  app/assets/images/testEngine
  create  app/assets/images/testEngine/.gitkeep
  create  config/routes.rb
  create  lib/testEngine.rb
  create  lib/tasks/testEngine_tasks.rake
  create  lib/testEngine/version.rb
  create  lib/testEngine/engine.rb
  create  app/assets/stylesheets/testEngine/application.css
  create  app/assets/javascripts/testEngine/application.js
  create  script
  create  script/rails
  create  test/test_helper.rb
  create  test/testEngine_test.rb
  append  Rakefile
  create  test/integration/navigation_test.rb
  vendor_app  test/dummy

  run  bundle install
  Fetching source index for http://rubygtestEngine.org/
  Using rake (0.9.2.2) 
  Using i18n (0.6.0) 
  Using multi_json (1.1.0) 
  Using activesupport (3.2.1) 
  Using builder (3.0.0) 
  Using activemodel (3.2.1) 
  Using erubis (2.7.0) 
  Using journey (1.0.3) 
  Using rack (1.4.1) 
  Using rack-cache (1.1) 
  Using rack-test (0.6.1) 
  Using hike (1.2.1) 
  Using tilt (1.3.3) 
  Using sprockets (2.1.2) 
  Using actionpack (3.2.1) 
  Using mime-types (1.17.2) 
  Using polyglot (0.3.3) 
  Using treetop (1.4.10) 
  Using mail (2.4.1) 
  Using actionmailer (3.2.1) 
  Using arel (3.0.2) 
  Using tzinfo (0.3.31) 
  Using activerecord (3.2.1) 
  Using activeresource (3.2.1) 
  Using bundler (1.0.22) 
  Using rack-ssl (1.3.2) 
  Using json (1.6.5) 
  Using rdoc (3.12) 
  Using thor (0.14.6) 
  Using railties (3.2.1) 
  Using rails (3.2.1) 
  Using testEngine (0.0.1) from source at /private/var/www/html/development/projects/testEngine
  Using jquery-rails (2.0.0) 
  Using sqlite3 (1.3.5) 
  Your bundle is complete! Use `bundle show [gemname]` to see where a bundled gem is installed.

when I use the rails command within the engine root (not in the dummyapp) I receive the following error:

$ rails -v
script/rails:7:in `require': no such file to load -- rails/all (LoadError)
from script/rails:7

this is my rails file in script/rails:

$ cat script/rails 
#!/usr/bin/env ruby
# This command will automatically be run when you run "rails" with Rails 3 gems installed from the root of your application.

ENGINE_ROOT = File.expand_path('../..', __FILE__)
ENGINE_PATH = File.expand_path('../../lib/ems/engine', __FILE__)

require 'rails/all'
require 'rails/engine/commands'

The error indicates that the problem stems from the two rails includes at the bottom. Is there anything I can do to fix this? Without the ability to use rails I'm unable to make use of any of the tools the rails command gives me such as scaffolding etc.

Any help is appreciated, and should you need any more information please let me know.