this thread is marked ‘resolved’ but I don’t think it is.
Otto42 links to a support ticket about a likewise problem in WP 2.6 and fixed in 2.6.1.
But this thread is about permalinks not working correctly in WP 2.7.1.
the workaround, using index.php by giving a category and tag base, doesn’t solve it.
.htaccess isn’t the problem either (writable, in the correct spot and written correctly)
My guess is that apache 2.2.11 on a Windows 2003 server is a bad combination for WordPress 2.7.1 permalinks.