Hi Jonathan,
I haven't experienced your exact problem, but I've been running PHP4.0.6 on IIS5 for some time now with no hassles.
Just a checklist of things to umm... check:
1. Are you using the ISAPI module or the CGI version? php.net says that the ISAPI module is not yet production quality, but I say it's fine, and it's heaps faster than the CGI version.
2. Do you have a Scripts virtual directory set up off the web site folder? If you're running the CGI version, you must have a VD named Scripts which points to C:\Inetpub\Scripts, and it must have the Read, Run scripts, and Execute permissions. I think if you're running ISAPI, you need all the above except for Execute.
3. You need to set the Application Protection to Low (IIS Process) for the Scripts folder, and also the web site folder (In the home directory tab).
4. You need to enable anonymous access (under the directory security tab).
5. The anonymous internet user - usually IUSR_<machinename> - needs to have access to the C:\Inetpub\Scripts folder, and it's contents. Also this user needs access to the web folder itself, and it's contents.
6. Have a look at php.ini, it's in the C:\Windows\ or C:\WinNT folder. It may have some authentication settings that may be stopping you (shouldn't tho).
7. Can't think of a 7th point right now... I'm tired. 🙂
Hope that helps...
Matt