Thats odd, the .htaccess is what i would have suggested except it wasn't included in 1.3.8 (I think), you could always try using the .htaccess from a 1.3.9 install as that has the requisite exemptions/allowances to let images work
.htaccess from 1.3.9h
#
# @copyright Copyright 2003-2010 Zen Cart Development Team
# @license http://www.zen-cart.com/license/2_0.txt GNU Public License V2.0
# @version $Id: .htaccess 16111 2010-04-29 22:39:02Z drbyte $
#
# This is used with Apache WebServers
#
# The following blocks direct HTTP requests to all filetypes in this directory recursively, except certain approved exceptions
# It also prevents the ability of any scripts to run. No type of script, be it PHP, PERL or whatever, can normally be executed if ExecCGI is disabled.
# Will also prevent people from seeing what is in the dir. and any sub-directories
#
# For this to work, you must include either 'All' or at least: 'Limit' and 'Indexes' parameters to the AllowOverride configuration in your apache/conf/httpd.conf file.
# Additionally, if you want the added protection offered by the OPTIONS directive below, you'll need to add 'Options' to the AllowOverride list, if 'All' is not specified.
# Example:
#<Directory "/usr/local/apache/htdocs">
# AllowOverride Limit Options Indexes
#</Directory>
###############################
# deny *everything*
<FilesMatch ".*">
Order Allow,Deny
Deny from all
</FilesMatch>
# but now allow just *certain* necessary files:
<FilesMatch ".*\.(jpe?g|JPE?G|gif|GIF|png|PNG|swf|SWF)$" >
Order Allow,Deny
Allow from all
</FilesMatch>
IndexIgnore */*
## NOTE: If you want even greater security to prevent hackers from running scripts in this folder, uncomment the following line (if your hosting company will allow you to use OPTIONS):
# OPTIONS -Indexes -ExecCGI
