You are assigning things to _SERVER?  That seems like a really bad idea.  What do you think that will do?  How about using $GLOBALS for that instead?

Having said that, I can't reproduce your problem here.  Are you running any 3rd-party extensions, or do you have variables_order in you php.ini file set to exclude "S" ?

I owe all an appology - it must have been a senior moment!!

The issue applies to using  $_SESSION  not $_SERVER, so please change that in all my references.

I have the following set (or defaulted) in php.ini
register_globals = Off
register_long_arrays = Off
register_argc_argv = Off
variables_order = "EGPCS"
This was not changed since running 5.1.4 when the application functioned as expected.

Also, the example to reproduce the problem should be altered in the included code as:

<?PHP
// index.php
include_once('script/funcs.php');
setTheme('default');
echo 'BG Color-->'.$_SESSION['thmBGcol'];
?>

<?PHP
// funcs.php
session_start();
$_SESSION['BASE'] = 'default';
function setTheme($thm)
{
  $_SESSION['thmBGcol'] = "#000066";
}
?>

Every page used starts with the include for funcs.php.

I think I understand why you could not recreate the problem?!
I was working using a frameset, where the SESSION values were being set in the page that defined the frames.
When the target pages were launched in each of the frames, all the SESSION values are gone. 
When I finally tested it outside of any frames, it all worked as expected.

To put this another way, when I create a simple frameset definition and at the start of it do something like:
$_SESSION['xxx']="abcdef";
that value never shows when I try to echo it from the page that the frame links to.

I have a WXP environment that is running PHP 5.1.5 and this problem does not occur. Unfortunately (for me!), I can not revert my Linux system back to pre-PHP 5.1.6

PHP doesn't know anything (and doesn't care) about frames.
This is obviously not PHP problem.

It apparently has to do with some sort of SESSION boundary handling, and was changed at the onset of 5.1.6. Perhaps some ini file setting that now defaults differently than before??

No, there were no such changes in 5.1.6.

Found root cause (but not reason for change).
The directory that was holding the php session values had its protection altered and Apache no longer was able to write to it. Hence no session values were found after being set. This did occur at the time the php 5.1.6 upgrades were applied, but have NO IDEA how or why. I know I did not do it, and no one else has access to the system.