Why does Android Studio 3.2.1 fail to interpret file content correctly--not even close--for half my project class files?

Question

I've never seen anything like this, nor can I imagine how AS could interpret completely valid *.java files so weirdly. Here's a 3-part picture of the IDE. Note that the *.java files that are shown as such have been interpreted correctly. The one with red underline does not in fact look anything like that. The other neighboring files (ones withouot the >) are displayed as having similar crazy content.

So what's up?

I opened every *.java file in the project in Notepad++. All look fine. None resemble what's shown below.

I exited AS and re-entered; problem persists.

The full text of the red message at the bottom is

    Unsupported Modules Detected: Compilation is not supported for following modules: 
SQhell. 
Unfortunately you can't have non-Gradle Java modules and Android-Gradle modules in one project.

A message I found in a different project says 4:09 PM Load Settings Cannot load settings from file 'C:\Users\Dov\Google Drive\AndroidStudioProjects\SQhell\SQhell.iml': Error on line 1: Content is not allowed in prolog. Please correct the file content

Here's that file (SQhell.iml):

<?xml version="1.0" encoding="UTF-8"?>
<module external.linked.project.id="SQhell" external.linked.project.path="$MODULE_DIR$" external.root.project.path="$MODULE_DIR$" external.system.id="GRADLE" type="JAVA_MODULE" version="4">
  <component name="FacetManager">
    <facet type="java-gradle" name="Java-Gradle">
      <configuration>
        <option name="BUILD_FOLDER_PATH" value="$MODULE_DIR$/build" />
        <option name="BUILDABLE" value="false" />
      </configuration>
    </facet>
  </component>
  <component name="NewModuleRootManager" LANGUAGE_LEVEL="JDK_1_7" inherit-compiler-output="true">
    <exclude-output />
    <content url="file://$MODULE_DIR$">
      <excludeFolder url="file://$MODULE_DIR$/.gradle" />
    </content>
    <orderEntry type="inheritedJdk" />
    <orderEntry type="sourceFolder" forTests="false" />
  </component>
</module>

I deleted every AS-related folder (couldn't uninstall; exported my settings first) and downloaded 3.2.1 a couple of weeks ago. No problems except with my own logic until this.

My app with build variants compiles fine as do smaller apps.

What should I do?

I don't even know how to Google this. What would I say? Has anyone seen such a problem before?

I'd also really like to know what caused this whacko scenario.

EDIT

I Googled android studio not interpreting files correctly and found nothing like this.

I suppose I could copy the project--or just the source files--to a different folder and see what happens.

I suppose I could uninstall and reinstall AS.

But how can this have happened???

EDIT 2

Here's proguard.rules. Line 1 <?xml version="1.0" encoding="UTF-8"?> flagged with the error below:

Here's "my" .gitignore in its entirety:

<applica

Here's other:

<application>
  <component name="RecentProjectsManager">
    <option name="recentPaths">
      <list>
        <option value="$U

Does this situation warrant a bug report?