Ok…this was boggling for a minute but thanks to my good buddies Google and the public Flex bug system I found the problem. It was a tough search so I figured I’d post here to help.

Error:

“Error while loading initial content” when trying to Debug and imported 3.0.1 AIR project

Fix:

Changing the namespace from 1.0 to 1.5 fixes this issue.
<application xmlns=”https://ns.adobe.com/air/application/1.5“>

You can read the full issue on the Flex bug list.