You'll need to create a Dropbox account (which will give you 2GB of storage for free) in which to store your files. In reality the files will reside on your computer, in Dropbox, and on your iPhone, but the service makes it all feel very seamless! The process is very simple: choose a username and password that you will later use to sync up with your iPhone app.
Once you have set up your account and have the desktop client installed, you will have a "Dropbox folder" somewhere on your computer. During setup, the application should have prompted you to place that folder somewhere. You can put it anywhere, but make sure you know where it is.