If you are using the Windows Installer XML toolset to compile very large .wxs files, you may have hit a bug where candle.exe or light.exe essentially complain that your XML is invalid. This was tracked down to a bug in the XmlReader class where XML processing instructions are not always parsed correctly. Back then I was told the bug would be fixed in the .NET Framework 1.0 SP3 or .NET Framework SP1.
Well, I just noticed that the .NET Framework 1.1 Service Pack 1 Tech Preview was recently released. If you are daring (or desperate) you can try the Tech Preview, it should contain the fix for XmlReader bug. Of course, the Tech Preview is not release quality code so you might encounter other problems.
In any case, my understanding is that the .NET Framework 1.1. SP1 and .NET Framework 1.0 SP3 should be released later this year.
[Update: Found a link with more information about the .NET Framework Service Pack Tech Previews]