The message "xcode cannot find the software image to install this version" seen in the organiser window... This is just a notification rather than a problematic error.
If you want to eliminate this message anyway, I found I was able to do this by running restore within iTunes. Part of that process involves downloading some stuff, which I presume is the 'software image'.
But, as explained in Technical Q&A QA1569 "This message does not prevent you from using the device for development purposes. The only effect is the inability to reinstall the OS currently on the device using Xcode." ...and that has been my experience. Back in the main Xcode window you're still able to click 'run' and send the app to the device to run.
...and it will run assuming everything else is set-up OK, but there are various other gotchas related to Xcode 4.2 and v4 devices:
As mentioned by Overbeeke you should ensure the 'deployment target'
of your project is set down to the desired version (the minimum
version of the devices you want to support) Additionally I would
point out that the 'SDK version' should normally remain set to the
latest (it's whatever SDK Xcode on your machine is using)
As mentioned by Kenneth Lam, in the new Xcode you need to frig around
with "armv6/armv7" settings if you want to support earlier models of
iPhone. Follow these instructions to add the right "Architecture" armv6 setting. Additionally I would point out (as per this answer further down) that there is a setting called "Required device capabilities" from which you need to remove 'armv7'. This is in your app's plist file.
I'm saying all this like I'm an expert, but I still can't get it to work on a v3.1.3 device :-)
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