I just got bitten by this one. Turns out you cannot change the folder structure of an application deployed using ClickOnce after it has been deployed. Now all I did was add a new folder, something that is quite common! If I had been renaming existing folders I might be able to understand this but with a new folder containing 1 new XML file? No not really and I think this should be allowed.
Anyway Microsoft acknowledges this as a bug, see http://support.microsoft.com/kb/911792/en-us for more details. I haven’t checked yet but sure hope this is fixed in Visual Studio 2008!
Other than that I think ClickOnce is great for deploying applications. Just make sure you know about Mage.exe and MageUI.exe so you can alter/update the manifests from development to test and to production. More about Mage here http://msmvps.com/blogs/theproblemsolver/archive/2006/04/05/89390.aspx.