Obviously, losing the ability to deploy to and test on an actual device was of concern. After a few worried minutes involving restarting the software (Zune & Visual Studio) and rebooting the phone we resolved this issue by rebooting the PC. Panic over.
Hopefully knowing that a reboot may be required may save someone else a bit of time.
* I have a separate machine running the Mango SDK RC which wasn't affected.
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