It's funny how much time a simple problem can waste!
A post just to warn others ....
I spent the last three days trying to figure out why I could not get Moodle set up on a server running windows server 2003, IIS (6) and SQL server 2005. I had experimented with a VMware instace running Windows XP, IIS and SQL server 2005 Express. My actual install just wouldn't work though. When I got to the part that sets up the DB and DB connections, it just wouldn't work ..... this error kept coming up:
PHP has not been properly configured with the MSSQL extension so that it can communicate with SQL*Server. Please check your php.ini file or recompile PHP.
Head scratching and searching to no avail ... Then ... after three days, one last check the version of PHP. I had upgraded to php 5.2.0 just released. php_dblib.dll used for the database connection is compiled from the php_5_1 branch.
Hope this helps someone else!