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Here's my story: First I found PlainText, which was barebones as far as a text editor but boasted dropbox support, and was free. It lets you create a folder within your Dropbox account and work inside it (option #1 I think). I pined for a robust editor for coding, and voila! I discovered Textastic. I didn't expect syntactical language support, but to at least be able to view code rightly was wonderful. However, as I found out, this app doesn't sync; rather you have to download and upload each file individually. So I've got two apps that do part of what I'm looking for.
So I guess that's to say the full Dropbox support is possible, and if you had it, this app would be the greatest thing since sliced bread. Hope you are able to figure it out.