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Can you check the Status Setup > Status Type > If Starting Status is checked > And also check what is the Next Allowable Statuses?
At what Status Controls are these controls checked?
Are you using Project Related Workflows?
Last but not least, Run Application Diagnostics for Setups to find out Project Status Control info....
Fixed - it turned out it was because the Start Date for the Project Manager Key Member was after the Start Date for the Project. Once that was corrected, we could change the Project Status.