I just fixed this issue by downloading the the R11 installer from http://dl.google.com/android/installer_r11-windows.exe and replacing the \tools directory with this one:
Run the downloaded installer.
Specify a different destination folder than the regular install and click through to Install.
At then end you can uncheck "Start SDK Manager...", and click [Finish].
The installer will create a \tools directory in that different folder.
Rename your regular "\android-sdk-windows\tools" directory, and copy that \tools directory to your regular "\android-sdk-windows\" directory.
The project should now build without the "Error 1".
I haven't looked into what is different in the 2 directories yet.
