Check out this guide,
http://www.simongibson.com/intranet/php2003/
Assuming you are running Vista SP1 or similar OS,
1. To enable php in .html files you need to add a new module handler, it's the exact same as the .php module handler except use the .htm extension, then make another for the .html extension.
At the server level click (double click you're server name in the left tree) Handler Mappings,
Next click add Modue Mapping on the right in the action pain,
Request Path = *.htm
Module= FastCgiModule
Executable= SystemDrive\YourPHPFolder\php-cgi.exe (example c:\PHP\php-cgi.exe)
Name = PHP in .Htm Via CGI (or whatever you want)
Then do that again for the .html extension. You can have multiple handlers for the same extension, I'm pretty sure you could get the php engine to parse asp files like this if you wanted to.
As for WebDav and you're last error I'm not sure, but it took me 3 hours to figure out the above (insanely simple solution) and I see people asking about it everywhere, saying you're forced to use .php extensions, when you're not, it's so simple I felt like the worlds biggest idiot when I figured it out.