Still, a lot of upgrades are only found when you run your app on the new OS on a device. Why is this? A lot of the bugs that come from these upgrades are memory management issues, multi-threaded issues, or networking issues. When you run on an emulator, many of these issues just never happen (memory/networking) or behave differently because of the difference in processor seed (multi-threading.) So you need to upgrade the OS on your test devices (you do have dedicated testing devices, not just your personal phone, right?)
Upgrading your iPhone OS is really quite easy. You download the new OS. You right-click on the "restore" button in iTunes, or you can use the Organizer in XCode. Either way, device is wiped, the new OS is installed, and then your data is reloaded from a backup (iTunes backs everything up automatically.) The only gotcha is that apps that weren't installed via iTunes, i.e. apps you developed and are testing, do not get backed up, so they disappear. This should not be a problem since you have the source code for such apps. However, in order to re-install from source code via XCode, your SDK must also be upgraded to the same version as the OS. Again, you probably upgraded the SDK first anyways, so no big deal.
Upgrading your Android device is not quite as straightforward. There are a lot of steps, so I won't repeat them all here. The upgrade is fundamentally different in that you replace parts of the system in place. Your device is not wiped. This is necessary because there is no automatic backup process on Android phones. On the iPhone, this is handled by iTunes. There is no analogous desktop software companion to Android. This is viewed by many as a pro, but in this case I consider it a con. Anyways, there are a lot of steps, but it is very smooth and very fast. In fact, it is much faster than the iPhone process because there is no delete/restore going on.
All of this points to some of the core differences between these platforms. Others have pointed to the Mac vs. PC scenario of the 80's as being similar to the iPhone vs. Android scenario of today. Apple went with a closed platform where they controlled everything, vs. the "open" combination of Windows plus Intel. Any manufacturer could slap an Intel chip in their machine and install Windows on there, with full freedom on what else went in to the machine. Same thing is going on here. Apple controls the OS and hardware of the iPhone. Android can go on many different types of hardware. Right now this is not making a big difference, since there are not yet a lot of Android phones. However, it seems likely that at some point you will see Android phones that are free with a contract or maybe $100 from Metro PCS or even pay-as-you-go carriers.
Ok so that was a tangent, what does it have to do with this issue? Well, by having a closed system, Apple can provide a lot of advantages. Upgrading is simple. For consumers, you get the upgrade from Apple directly. You might notice the Android link above is from HTC, the maker of the first Android phone. Most consumers will get the upgrade from T-Mobile. Notice that Google is not even in this conversation, even though not only do they make the OS, but it is open source. In addition, many developers I know are dreading the proliferation of Android. Currently development for Android is nice, in fact a lot nicer than for iPhone. The development/emulator scenarios are equivalent, but debugging on devices is much simpler. However, when more variants of Android appear, and those variants are more specific to the devices they run on, then right once / run anywhere fades away. Again, notice that the OS upgrade came from the handset manufacturer already. That is very significant.