Image modules automatically creates smaller sizes of your images for use as thumbnails and so on. These different sizes are called derivatives.

To set sizes for derivatives go to Administer >> Site configuration >> Image.

By default, there are two derivatives and the original size:

Original

This is the maximum allowable resolution for images, and images larger than this will be scaled down to fit. Leave these dimensions blank to allow images of any size.

Thumbnail

This size is used for image galleries and teasers of nodes that attach image nodes.

Preview

This size is used for image nodes

You can define further derivative sizes, for use in attaching nodes, views, and so on.

You can set both dimensions to force images to fit within this size. Eg, set 100x100 and portrait images will have a height of 100 and a smaller width, and landscape images a width of 100 and a smaller height.
If you set only one dimension, all images will conform to this dimension exactly.

The link setting for each derivative determines which links to derivatives appear on the image node page: you can have a link open in the same window, in another window, or not be visible at all.