David,
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I've noticed the error you described come up a few times. Try the following:
1) Check the modules referenced in the application.xml really exist. (this means the error message is correct and something really is wrong with the application.xml)
2) Try editing the application.xml to add a space and save the file. I've seen RAD need this nudging to re-run the validation and notice things are ok.
3) Try deleting the project and reimporting it.