simulator is a totally different beast than the physical iPhone. in theory the simulator should act in the same way the iphone does, but if you are messing around with other directories or things of that nature you need to be on an actual iphone.
there are ways to bypass code sign cert in xcode, but i haven't figured it out yet.
there are xcode jailbroken templates that supposedly will bypass it... you just sync to your phone and then use idid to sign it so the phone will run it.
here is the latest toolchain and setup instructions:
Building - iphone-dev - How to build the toolchain. - Google Code
here is the templates and the developer's guide to set up and use them:
[XCode Template] for SDK and Open Toolchain API in firmware 2.0 - Hackint0sh