Its finally working… Calendaring sharing with Sarah now works. I got fed up trying to do it with my own WebDav and CalDav servers, and downloaded Jungle Disk. Jungle disk is simply a local server which interfaces with Amazon's S3 storage and provides a webdav wrapper. So when Outlook 2007 asks for a Webdav server, me and Sarah just point it at localhost and Jungledisk takes care of syncing with Amazon S3.
Yep its not free but its certainly worth the bandwidth and storage space for a tiny calendar file, if it means I can see Sarahs Calendar and she can see mine.