This was a problem I had early on – most of my apps required use of the camera or the photo library.  For the longest time I believed that you couldn’t test the photo library on the simulator.  I was wrong, it is actually pretty easy to get pictures into the simulator for testing.  Here is a video demo of me doing just that:

Essentially, all you need to do is drag a picture file onto the Safari icon in the simulator and when it shows up click on it until you get a “Save Image” dialog.  Press that button and presto – your image will be in the photo library.

The next thing would be to add videos to the simulator. Safari does not seem to want to save them…! Have you been luckier than I?
Thanks,
Pat.