I have used the Rigel simulator which is quite good. I dont know if its available for download anywhere. I got it free with a book - Programming and interfacing the 8051 micro by Yerelan & Ahluwalia.
I bought the book from RS (about 30 Sterling)
With regard to the serial port, have you tried turning off hardware flow control on the port?
I have forgotten most of what I used to know about RS232, but I think you need to raise the DSR line if turning off HW flow control doesn't work. Can somebody please tell me if I'm wrong.