Is there any kind of software firewall installed on that server? Something is not letting the php software talk to the SQL software.
One more thing. Is your SQL database listening on the default port of 1433 or has it been changed? I just discovered that my code just assumes that the database is running on the default port
I just did some more reading on SQL express. This is how you find out what port it is using (I guess it doesn't always use the default port):
Donīt use the standard MS-SQL port (1433), use the MS-SQL dinamic port under SQL Server Configuration Manager -> SQL Express Protocols -> TCP/IP properties -> IP Adresses -> IPAll
If the port it is using is not 1433, then that is the problem and I know how to fix it.