Just a note to say that I was also bitten by this issue while trying to
set up an Edgy Xen domU.  Since my dom0 is not Ubuntu, and all the other
(working) domUs use the same non-Ubuntu kernel, I did not immediately
suspect the kernel.

In fact I spent several hours googling around, setting --debug and so
on, before giving up and deciding to come and file a bug against
upstart, at which point I found this one and then of course it became
obvious.

Some error message about lack of inotify support would probably enable
people to work this out a lot quicker, and this probably should be
mentioned in the docs also.

Cheers,
Andy

-- 
does not read /etc/event.d if inotify unavailable
https://launchpad.net/bugs/68904

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