Directory perms shouldn't cause source to show.. This is a silly question but you have restarted apache haven't you? :)
It's always the simple things you over look :)
Do you have a line such as:
AddType application/x-httpd-php .php
in your httpd.conf?
If you files end .php3 you'll need to add that on the end as well
AddType application/x-httpd-php .php .php3
