From the menu, select Project > Edit Project Settings...
Under Architecture > Base SDK, choose one of the available device options: iPhone 3.2 or iPhone 4.0. If you are iPhone-only, 4.0 is the way to go.
Close that window.
From the menu, select Project > Edit Active Target "YourTarget"
Under Architecture > Base SDK, choose one of the available device or simulator options: iPhone 3.2 or iPhone 4.0.
If you want to target previous iOS versions, then in that same window, under Deployment > iPhone OS Deployment Target, select the lowest version you want to support. Note that support for 2.x versions through the app store is deprecated. See the "Readiness Checklist" quote above.