Here's how I did it.
1. Move your calibre database to Public folder in dropbox. You can do this by opening up preferences and choosing a new folder location. This will take a while. Go make a cup of coffee and read a few chapters of a book.
2. Download the calibredbextract
found on this thread. Extract the contents into a folder called "calibredbxtract" and place it somewhere. I put mine in the C:\Program Files\Calibre2.
3. Start up your MS DOS command prompt by going to Start -> Run and type "cmd" and press return. A black window will open with "C:\folder path\>_"
4. type cd c:\Program Files\Calibre2\calibredbextract\bin
Your MS DOS command prompt should say:
C:\Program files\Calibre2\calibredbextract\bin>_
5. type calibredbxtract.bat c:\data\dropbox\My Dropbox\Public\calibre_library\
where "c:\data\dropbox\My Dropbox\Public\calibre_library\" = the path to your public dropbox folder. I.e., mine is C:\Documents and Settings\Jane\My Dropbox\randomname\
6. This should generate the xml files into a folder called "_catalogs"
7. Go to your iPhone.
8. Tap "online catalog"
9. Tap the "+" in the lower right hand corner
10. Type in a name for your catalog (i.e., Dropbox Catalog)
11. for the URL type in the public link to the file named "catalog.xml" (you can get this by browsing to this file in your public folder -> calibre library -> _catalogs