This morning, quite out of the blue, the Windows Phone 7 emulator (Mango release) refused to initialize. The error message complained about a corrupted saved-state file and recommended that I delete a particular file named SOME_LONG_GUID.DES in C:\ProgramData\Microsoft\XDE.
After some poking around, I found the file (which actually ends in DESS, not DES), deleted it and restarted the emulator. No dice. Now I'm getting some sort of "internal error" message.
Next I deleted the SS file also found in C:\ProgramData\Microsoft\XDE. Still broken.
Restored the DESS file, but not the SS file. (SS == Shared State?). Now we have some progress, but the emulator is clearly booting from scratch and takes several minutes to initialize. Deploying apps from VS doesn't appear to work either.
As a hail mary, I restored the SS file and tried again. All's well!
Hope this helps someone else with the same issue.