Nir (or anyone else Googling this up),
I'm having the same problem with ISE Simulator v9.1. The work around that I found was to "touch" the file the ERROR:Simulator:170 barks about.
For Dave's example, just open "C:/projects/Xilinx/tutorial2/counter.vhd", tweak something, and re-save. (I just add a blank and then delete it.) This will cause the simulator to recompile the source and eliminate the error. You may have to do this for a series of source files if ISE Simulator has lost it's way.
The error has nothing to do with "-incremental" compilation. If someone finds a way to "recompile all" for the ISE Simulator, please pass it along.
-Mark