I was facing problem running AIR projects since morning. Reinstalled Flex builder 3.0.2 a couple of times. I thought it was an issue related to upgrading to Flash Player 10. However, I later found (through google) that to make the older AIR projects run with the new release of Flex builder, you need to change the line
<application xmlns="http://ns.adobe.com/air/application/1.0">
In app.xml to
<application xmlns="http://ns.adobe.com/air/application/1.5">
Param Gyaan 