It sounds to me like one of your DLLs is the wrong version. There was an issue of some sort with the move from SQL2000 to SQL2005 that the creators of PHP didn't resolve themselves. There are a variety of posts about it here: the following link

I believe the DLL is ntwdblib.dll and the version needs to be version 2000.80.194.0 at the very least. If you're running Apache or WampServer, there is an identical dll where the Apache DLLs are stored that needs to be overwritten.

Note: I was having this issue a few days ago and finding the correct DLLs and overwriting both allowed it to work.

Also: You may need to setup remote connections. Sql Server 2005 has remote connections disabled by default. You can allow remote connections by running the SQL Surface Area Configuration utility.