In my spare time I've been writing a python script addon for XBMC. While developing I was tailing the log file, but trying to restart the application, I got the following error message:
ERROR: Unable to create application. Exiting
It turned out that for me, this error was caused by keeping the tail open on the log file when trying to restart the XBMC application. Closing the tail and reopening each time I launched the application made the application launch correctly. If you're not using a tail, the same error may occur when files used by XBMC are locked or being accesses by left over threads or other applications.