IIS can’t find php.ini
I installed PHP on the Windows server today and ran into what seems to be a fairly common problem (BrianW can affirm): sometimes PHP is unable to find the php.ini file when processing web-based content. In my case PHP was installed as an ISAPI filter. I suspect that when using the ISAPI filter PHP must be looking in the in the location IIS is running from, rather than the location of the ISAPI DLL (which is located in the PHP folder).
To address the problem I added a PHPRC environment variable. Now everything seems to work as expected. There are a number of options for specifying the location of the php.ini file. See the PHP documentation for runtime configuration.
IIS returns an error
If you’ve fully set up PHP and configured IIS correctly (including enabling the Web Service Extension) then one last thing to check is the path to the DLL specified for the Web Services Extension vs. the value for the application extension in the web site properties. These should match exactly.