No..wasn't toasted
I DID however finish the quest finally last night. Went back to the Pally and lo & behold...there is the Sword! "Damn I could have used that!" I wanted to click but alas....
So yeah the item disappeared, but came back after the quest finished -- as well as a small stack of Priests to recruit who also disappeared.
I read some post from back in December regarding the quest, and some guy said that if you go too far in looting and clicking things, that the item would no longer be available. This is what I must have done.
Well I just wanted to post an update for future players -- thanks for the input gents.
Cheers!