I've tried it on another computer.
This time I've used Help->Install New Software.. to update the software (on the first computer the update was done from a downloaded .zip file).
Now I can create a new project as expected.
I can see an additional (missing before) item on the Installation Details dialog:

Will re-install the software on the first computer and see what happens.
UPDATE:
Seems to be working OK on Windows XP.
After several uninstall and re-install on Windows 7 Professional (64-bit) the problem persists.
On Windows 7:
With only KDS v1.1.1 installed (no SDK) two boards: FRDM-K64F and TWR-K64F120M are available under New project setup. Kinetis SDK is understandably disabled.
With SDK support added additional boards are available under New project: FRDM-K22F, TWR-K22F120M, and TWR-KV31F120M. The Kinetis SDK option is only available for the three newly added board.