My apologies, I hadn't dug into the file and so didn't realise that the list is dynamically built. You need to look in the link.js file in the tinymce/jscripts/tiny_mce/themes/advanced/js directory. In there you will find a method fillTargetList that populates the list.
One thing you need to consider is that if you remove the "not_set" option, then when you open a link where the target wasn't set, you will not have an option to display. So, in the init method you will need to handle that.
With respect to upgrade, what I meant was that if you decided to modify these files, then when you next upgrade TinyMCE, and replace your current installation, you will overwrite your changes. So during an upgrade you will need to merge your changes to these core files with the new files in the upgraded TinyMCE.