Why doesn't the ip default-gateway xxx.xxx.xxx.xxx command work on interface Vlan1. Using c2900xl-c3h2s-mz.120-5.WC10.bin
The 'ip default-gateway x.x.x.x' command is only allowed under the global config, not under an interface.
Keep in mind, you are allowed to type the command while under the interface, but it will be applied in the global config. IOS is smart enough to change the mode from interface level to global level.