So I took the step upgrading to Xcode 3.2.5 (iPhone SDK 4.2) and now I cannot run to device. I always see this now in the dev environment:
You can double-click or right-click on your target and pull up it's Info. Click on the build tag and look for the setting for Base SDK. You probably want this set to Latest iOS, which is a new option and should prevent this from happening the next time you upgrade.
However, you might be better off doing this at the Project level, by selecting Project -> Edit Project Settings and following the steps above. You can also select the general tab under the project settings and set your Base SDK with the "Base SDK for all Configurations" drop down. That has the advantage of fixing a problem that sometimes crops up with your linked frameworks (if they are all in red in the sidebar, you have the problem).