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Could this just be a display issue? I see that you say that the _dashboard_ claims that the VMs are starting on the compute VM rather than the xenserver host - however if the nova service that you're running really is using the XenAPI driver then that nova service should not be physically able to start a server on the compute VM.
I assume you've checked actually where the VM is running? Does XAPI show the VM as started on the XenServer host? (either xe vm-list or with XenServer?)
