Finally figured this one out! I noticed that in the C:\Program Files (x86)\SAP BusinessObjects\Design Studio\plugins folder that I had files with both a May 2013 (from a DS 1.1 SP2 install) and Nov 2013 (from DS1.2) timestamp. My coworker, with a working install of 1.2 only had the files from Nov 2013. So, I uninstalled DS 1.2. Saw the remaining files from May 2013. I cleaned out the folder, reinstalled DS 1.2 and all is well! 
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Re: Failed to create the application. (DS 1.2)
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