I ran into this strange error today and it's strange because both the error and the solution has nothing to do with "Window1.xaml". Typically, this is the message you receive if you misnamed "Window1.xaml" in App.xaml's StartupUri attribute. That was not the case for me today as everything checks out so something else was going on.
I was able to find the solution on this MSDN forum post. Seems like many people ran across this while trying to run downloaded samples on their local workstations. The resolution? Add a space to App.xaml , remove it, then rebuild. Strange solution but it worked. I suppose this is a bug in the code .NET 3.0 generates and a simple rebuild on your local workstation fixes it.
This is in VS 2005, not sure if this has been resolved in VS 2008 yet.