@Raphael - I have already tried purging cache but that didn't make any difference.
I did try setting the cgi.fix_pathinfo = 0 as per Guillermo's suggestion but still no luck.
With 'Use Slash' disabled the SCORM player opens a new window but doesn't show any external resources.
As a test I setup a new install of Moodle 2.5.1 and got the same issues there too which makes me think it would be an environment/configuration issue.
I've got PHP 5.3.27 fast-cgi setup on windows 2008 server with IIS 7.5. Please see a screenshot of my server check attached. (All ok except a warning for Intl extension).
Another approach I am looking at - what configuration can I change on the server to help enable 'Use Slash' argument?
Please help before I jump off a cliff!!