Then that fully explains why PHP can't run out of that directory. Note this statement from the DreamHost wiki:
You can use PHP (which runs in CGI mode on DreamHost) in your directories (that you own), but only the user "that CGI runs as" - the one set up in the account panel on the "Domains -> Manage Domains" screen - can run CGI processes on that domain.
This is due to DreamHost's implementation of suEXEC, which allows increased security in that the webserver, and any CGI process, runs as "your user", so you do not need to give permission to any other user (or set "loose" permissions). In fact, if you do, they won't run! This is a "Good Thing"(tm)
A much better way to give access to a friend is to just make create a subdomain for him to use!
--DreamHost Tech Support