The XP system I just bought come with IIS 5.1, and I haven't been able to see
how to add a Web service extension with that.
That's because it's not the same in IIS 5.1.
I would recommend that you use the isapi version rather than the cgi version, although either should work fine for you.
In the IIS service manager, found in the control panel - administrative tools, in the configuration for your web virtual directory, you can set mapping where you associate a file extension with a particular program or dll. For the php isapi version anyway, you make sure or add .php mapping to c:\php\php5isapi.dll
As far as the permissions, make sure "simple file sharing" is not enabled on XP Pro, and that you are using the ntfs filesystem. Then open the properties page for any file or folder from windows explorer then the Security tab where you control the access control list permissions.