Note from Michael 12/28/2011 - I have changed my accept from this (rubytheracer) to above (nodejs) as therubyracer has code size issues. Heroku now strongly discourage it. It will 'work' but may have size/performance issues.
If you add a runtime, such as therubyracer to your Gemfile and run bundle then try and start the server it should work.
gem 'therubyracer'
A javascript runtime is required for compiling coffeescript and also for uglifier.
Update, 12/12/2011: Some folks found issues with rubytheracer (I think it was mostly code size). They found execjs (or nodejs) worked just as well (if not better) and were much smaller.
n.b. Coffeescript became a standard for 3.1+