I'm working on this now. I have the same issue.
The MAJOR PROBLEMS here are that:
1) Apple never provided a warning dialog that this might disable people developing under Snow Leopard.
2) There is no easy way to undo this.
3) This should not happen on a point release update.
I've tried to install the previous ipsw from 5.0.1 for my Gen 4 IPod Touch from here:
where to download ipod touch firmware restore links
It will not install.
I've downloaded the Lion Xcode 4.3.1 from here (sign in as a developer first)
Lion Xcode 4.3.1
And run some scripts from the Dev Forums here:
sudo cp -R /Volumes/Xcode/Xcode.app/Contents/Developer/Platforms/iPhoneOS.platform/Developer/SDKs/iPhoneOS5.1.sdk /Developer/Platforms/iPhoneOS.platform/Developer/SDKs/
sudo cp -R /Volumes/Xcode/Xcode.app/Contents/Developer/Platforms/iPhoneSimulator.platform/Developer/SDKs/iPhoneSimulator5.1.sdk /Developer/Platforms/iPhoneSimulator.platform/Developer/SDKs/
sudo cp -R /Volumes/Xcode/Xcode.app/Contents/Developer/Platforms/iPhoneOS.platform/DeviceSupport/5.1\ \(9B176\) /Developer/Platforms/iPhoneOS.platform/DeviceSupport/
cd /Developer/Platforms/iPhoneOS.platform/DeviceSupport/
sudo rm -f ./Latest
sudo ln -s ./5.1\ \(9B176\) ./Latest
Unmounted the Lion DMG and restarted Xcode. This allowed me to test 5.1 in the simulator but broke every build to every device with a SIGABRT or link error.
I'm off to the Apple store to have them restore my device. If I get any more information, I'll let you all know. This has been a VERY EXPENSIVE and VERY UNPLEASANT surprise.