I found the answer for my particular issue below. The first part didn't work, so I, like the person who wrote the entry, had to use the second part and it worked like a charm.
First, I had to "show hidden files and folders" by going into the Control Panel and typing "folder" in the search bar. This brought up a few options, one of which was "Folder Options" and under it, "Show hidden files and folders" which I clicked on. Then click Apply and Ok, then close out of those windows.
Then follow the instructions that I found below....
The error occurs when you connect your Windows Phone 7 device to your computer with the USB cable. Zune opens and tries to connect to the device, but pops up an error message that says "Can't connect to your phone. Disconnect it, Restart it, then try connecting again".
The most common solution to this from reading the forums is as follows:
There is an issue with the Zune personal digital certificate.
To resolve this issue, create a new certificate:
If it is running, close the Zune software and disconnect your phone.
Open Certificate Manager. To do this, click Start, type certmgr.msc, and press Enter.
Expand Personal, and then expand Certificates.
Click the heading for the Issued By column to sort the column, and then look for one or more certificates that is issued to "zune-tuner://windowsphone/...".
Right-click that certificate and then click Delete. Click Yes.
From the File menu, click Exit.
Start the Zune software and connect your phone to create a new certificate.
This seems to resolve the error for some people, but it didn't work in my case. Restarting Zune didn't create a new certificate. So after a lot of digging around with process monitor I found an additional step that worked for me and triggered the Zune certificate to be recreated.
Delete the Zune certificates following the instructions above
Before restarting the Zune software, locate the folder C:\Users\<UserName>\AppData\Roaming\Microsoft\Crypto\RSA
Inside that folder there should be a directory named something like S-1-5-21-1234567890-1234567890-1234567890-1111
Rename this folder e.g. adding .bak to the end of the folder name
Restart the Zune software - the folder should be recreated and a new Zune certificate should be created in the certificate store
I needed to restart Zune one more time in order for the error to clear and the phone to connect successfully
I hope this helps anyone else out there with the same problem.
Hope this works for someone else. I'd like to thank those in the links above who posted the great answers!