[cannot connect to database]

Something I just noticed, don't know if you did a typo in your post or it's in your code but:

 

$connection = mssql_pconnect("$dbhost","$dbusername","$dbpasswd" )

 

should be mssql_connect not mssql_pconnect

[cannot connect to database]

There could be any number of reasons but try this one first:

 

Go into sql server and query select @@servername (<instance name>) and put this value instead of localhost.

remove the username and password so you log in as windows authentcation that is if sql server and php are running on the same box.

 

 

$connection = mssql_pconnect('<instance name>','','')