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I have a slightly different configuration for my main windows computer in that I placed my users directory on my D:\ drive which is a raid 0+1 array. Unfortunately this confused the android emulator so that it continued to look for my avd files on the C:\ drive giving me this nice message:
This is doubly stupid because I had just used the device manager 5 minutes ago to create that virtual device in the correct location.
If this happens to you one solution that has worked for me is to create an environment variable name "ANDROID_SDK_HOME" with a value of "D:\Users\Steven\.android"
Then restart the AVD manager and you should be able to create and start the virtual devices now (provided google has not screwed anything else up).
Quality Control Fail
Its obvious that somewhere along the line the users directory location was hardcoded into the virtual device manager. I have to say I am less than impressed with google's code review process if something like this slipped through. Finding the users directory is a simple environment variable lookup %USERPROFILE%. Not exactly rocket science.
Saturday, July 20, 2013 at 12:39:13 AM Coordinated Universal Time
Wow. I've been having the same trouble "PANIC: Could not open: phone1". I have the environment variable (ANDROID_SDK_HOME) set to E:\Users\Barney\.android and couldn't get anything to work. After reading this message, I copied that directory to the C: drive (ANDROID_SDK_HOME still set to the E: drive) and everything works fine now! Thanks for the tip!