I have Xcode 4 and Xcode 3.2.6 installed. The process for updating the SDK is probably the same as 3.2.6. In the Groups & Files pane select (single click) on the project icon (uppermost item in the group) Then either choose File>Get Info or right click or control click and from the context menu choose Get Info.
Choose the Build tab in the info window. Under Architectures there is a row Base SDK Click in the Value column of this row and select, if available,
Latest iOS (iOS version number). Otherwise choose the latest dot update.
You may need to then close Xcode and then reopen the project. It should then build successfully. Closing and reopening is not necessary in Xcode 3.2.6, so you might consider updating Xcode at some point. There is some reorientation needed for Xcode 4, but I have found that workflow has improved a lot. The process is slightly different in Xcode 4. If the "latest" option is available choose it, as future SDK updates will not require you to reset the Base SDK.