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Build 20020416 It is possible to build a self-hosting workspace which can break the running host IDE: 1. Import entire host IDE plugins, choosing NOT to import the plug-ins inside the workspace. 2. Connect to a remote server to replace one of the imported plug-in with its source version 3. An error is raised, indicating the plug-in couldn't be removed, but if exiting and restarting the host IDE, it got removed some essential files.
Your observation is correct, and that is why you are warned against using that option. We will remove it soon because it can have dire consequences. If you want to continue to NOT copy contents into the workspace, you must remove the binary project first without deleting the contents, then add the source project from the repository. Also note that overriding a binary project with the project from repository is not a good idea because Team will make a mix of resources (it will not remove your project before creating a new one). You may end up with a mix of old and new. I will keep this defect as a reminder to remove the checkbox and always copy the contents.
The next integration build will not have the option to import without copying.