Setting up your project file
You need to add libxml2.dylib to your project (don't put it in the Frameworks section). On the Mac, you'll find it at /usr/lib/libxml2.dylib and for the iPhone, you'll want the/Developer/Platforms/iPhoneOS.platform/Developer/SDKs/iPhoneOS4.0.sdk/usr/lib/libxml2.dylib version.
Since libxml2 is a .dylib (not a nice friendly .framework) we still have one more thing to do. Go to the Project build settings (Project->Edit Project Settings->Build) and find the "Search Paths". In "Header Search Paths" add the following path:
$(SDKROOT)/usr/include/libxml2