It works with PHP4 and PHP5, but I had been having trouble with it lately on my machine that runs PHP5. When I installed Cake, none of the CSS files I had would show up. After poking around a bit and scratching my head for a bit, I found that it was a problem with mod_rewrite for Apache not being enabled. Basically you have to uncomment /cake/app/config/core.php line 42 and everything should work like a charm:
// Uncomment the line below! define ('BASE_URL', env('SCRIPT_NAME'));
There's a hidden dev gotchas page in the CakePHP Wiki that documents all this.