I see that you figured out a workaround, so you probably don't care what the problem was. But I ran into this problem today and found your post searching for the error message from the scanstate.log, "Only one top level element is allowed in an XML document". I figured it out, so I felt I should add my solution to your thread in case anybody else comes looking for this error.
This is an XML structure error. The text tells you what the problem is - you can only have one top level element per XML file. In a USMT XML file, that top level element is <migration>. The file starts with that element (after comment tags which don't count), and ends with </migration> to close the top level element.
In my case, I'd appended some more exclusions to my XML and left an orphaned </migration> element in the middle of the file. Once the <migration> element was closed with the </migration> line, standard XML rules require that you can't start any more new "top level elements".
I removed the orphaned </migration> line and my custom.xml parsed correctly.
If you'd located line 7349 in your modified migapp.xml file (as indicated in the scanstate.log file you uploaded), you would probably find a line </migration> right above it. Also, Best Practice is not to modify the stock xml files for USMT - just add your own custom.xml and add it to your command lines with /i (or copy migapp.xml to another name and modify that).
/mark
