This should be set the simulator version of a currently installed SDK. For later versions of XCode, you can set this value to 'iphonesimulator' to automatically use the latest available version of the SDK. If this does not work, you can identify a specific version by issuing the following command in Terminal:
xcodebuild -showsdks

It should typically look like 'iphonesimulator4.2' where the version number may change depending on your XCode installation.