Well that was a good (but horribly time consuming) lesson. The details are on my site if you want to see.
Who'd of thunk that once you set Timer1 to use a crystal you can't reprogram the chip without erasing it first. And you can't erase it with MPLAB. Weird!
EDIT: My 1000th post!
If you connect to a working chip then swap in the bad one you can erase it from MPLAB. We ran into the same problem in class but noticed the problem followed the chip. You could have seen this if you had switched to a simple program to test your chips and PICkits.
Live and learn.