project page - http://drupal.org/project/imagecache
what does it do? - ImageCache allows you to setup presets for image processing. If an ImageCache derivative doesn't exist the web server's rewrite rules will pass the request to Drupal which in turn hands it off to ImageCache to dynamically generate the file.
Note: ImageCache has been moved into core in Drupal 7
check out this website for additional information and demonstrations on the imageCache module