1. Put code to CVS or SVN.
2. Add a static and final constant that controls whether app is paid or free.
3. Develop the paid version.
4. Commit code to CVS/SVN.
5. Create a branch for the free version.
6. Edit branch to include necessary changes for free version (package, references to R.java, the constants, etc.)

When developing new features, implement them to the paid version first and when they are ready, merge them to the free branch. If possible, it helps to design the codebase so that any possible version-specific code is clearly separated to specific files, not all over the codebase.

Any solution that involves Ant or Maven scripting that manipulate the code before building (or god forbid, straight up "bytecode raping" :)) are an extremely bad idea. I have learned in my day job that whatever code you deliver must exist "as is" in version control. If you ship manipulated code, you don't know what code was executed when a user reports an error.