As of Drupal 4.2, adding “AddType php-cgi .php” to .htaccess (after “#Set some options”) does allow the image module to work. However, at the same time it messes up text story posting by escaping ’ and " characters (it adds backslashes to them). Apparently this is because the php-cgi wrapper doesn’t handle magic_quotes settings properly.
What this means in practice is that if you just want to allow yourself as Drupal administrator to create images, you can do that by editing .htaccess, creating your images, and then restoring .htaccess to get rid of the AddType line. But you won’t be able to let ordinary users create images, no dice.
(Unless, and it’s a big unless, everyone is willing to use the HTML entities “’” and “”" instead of ’ and " in all text posts!)