The error doesn't actually have to do with XML (Application Builder and XML functions tried to use the same error code 1107). The problem is with a dll not being registered. If you run regsvr32 on C:\Program Files\National Instruments\shared\Installer\MergeMod.dll to register it, Application Builder should then be able to generate installers. This should have been taken care of during the install of LabVIEW. The command line to use is:
c:\winnt\system32\regsvr32.exe "C:\Program Files\National Instruments\shared\Installer\MergeMod.dll"