That is odd... You can try doing it a different way.
Use the BlackBerry toolbar and press the connect to device button to launch the simulator up.. it should bring up all the services needed.
Then press the "Publish" button on the Blackberry toolbar and step through the wizard. It will publish the application to your local MDS Development server.
When you have successfully published the application, use the MDS control center on the simulator to search and download your application.
If all else fails, you can always try the good old fashion re-boot