The latest SDK only supports iOS 5 and up (if you want to target 4 you have to install an old one), and there are no ARMv6 devices which can run iOS 5, so it makes sense.
Ouch. Do you have to have two Xcodes side by side, or can you install old SDL into new Xcode?
You have to have two side by side.
Officially, side by side is the way to go. Unofficially, you can sometimes merge the actual SDK bundles into the most recent Xcode directory.
Just FYI: New Xcodes install into /Applications/Xcode.app (and things like instruments are now in /Applications/Xcode.app/bin/Developer/Instruments.app or something like that) and the old Xcode is in /Developer.