I had a similar issue with my setup and posted the steps I used to
resolve it.  Might work in your case as well.  You can find them in
the following thread:

http://groups.google.com/group/versions/browse_frm/thread/c8ff04aef9cca8e8?hl=en

On Jun 22, 8:54 am, amieljc <[email protected]> wrote:
> Hi,
>
> I've the following error when trying to use command 'Compare' in
> Versions.
> "The FileMerge application could not be located. Please install Xcode
> Tools from the Apple Developer website."
> In a terminal window, "xcode-select -print-path" point to the right
> location (which is for me "/Developer/iPhoneSDK 3.0") and FileMerge
> can be found under '/Developer/iPhoneSDK 3.0/Applications/
> Utilities'...
> Any hint how to use FileMerge with Versions ?
> Regards,
>
> Jean-Christophe
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