For what it's worth, I've been battling with this for ages - trying just about everything I can find on the web, to no avail. However, I just tried pointing my browser at the test PHP file (previously I'd been trying a test file in my normal virtual directory)installed in c:\Inetpubs\scripts\php (i.e. http://localhost/scripts/php/test.php) and bingo, it worked!
Spurred on by this victory, I created a new virtual directory on my C: drive and copied the test file there. Again it worked.
However, I still can't get it working in a virtual directory that is a share, rather than local drive - my guess is that PHP/IIS isn't going to work with files located on a remote shared drive.
For what it's worth, I used the PHP 4.0.4 EasyWindows installer. I've read a lot of stuff about setting the file type for .php to <path>\php.exe %s %s - my working setup doesn't have the %s %s. Also, there's a lot of stuff written about permissions which doesn't apply if you're using Win2K on a FAT32 partition.