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I've posted a workaround and some discussion here - http://world.episerver.com/Modules/Forum/Pages/Thread.aspx?id=57526&epslanguage=en.
In general I suppose there shouldn't be any issues for this functionality to support VPP as well. What's going behind the scene is that original image as stream is added to the gallery (in DB and physical image file is saved on the disk). And later using Bitmap and Graphics pbjects from System.Drawings namespace thumbnail image is generated. So more or less everything is done in-memory.
But as usual - there most probably was reasonable reason not to implement VPP :)
A standard Relate / EPiServerCommunity installation adds Virtual Directories in IIS to point to the DocumentArchive and ImageGallery folders. Are there any known reasons why EPiServer Virtual Path Providers cannot be used instead of Virtual Directories?